Nifty + Nifty Next 50: What is a good mix?

Want to combine NIfty Next 50 Index fund and NIfty 50 Index fund? Here is how the mix has performed in the past

Published: May 1, 2020 at 11:22 am

Frustration about varying active fund management and the need to shift funds has led to more and more investors considering index investment options. Although still a minority, it is definitely a healthy trend towards simpler portfolio management. A combination of Nifty + Nifty Next 50 index funds is a neat way to get large cap and mid cap exposure, but what is the right mix? An analysis.

Although SEBI has defined the top 100 stocks by free-float market cap as the “large cap universe”, we have repeatedly pointed out that Nifty Next 50 is NOT a large cap index! This is because of the large impact costs down the NIfty 100 ladder. See Warning! Even large cap stocks are not liquid enough! Can you handle this?

While we now have a Nifty 100 index fund – Axis Nifty 100 Index Fund Impressive AUM but is it expensive? – this is equivalent to adding 10%-20% of Nifty Next 50 to Nifty 50. See: Combine Nifty & Nifty Next 50 funds to create large, mid cap index portfolios

Those who wish to add more of Nifty Next 50 or like the freedom to freely rebalance between the top and bottom halves of the Nifty 100 may prefer a two-fund combination.

As pointed out in Benjamin Graham’s 50% Stocks 50% Bonds strategy analysis, there cannot be an optimal mix when you add two asset classes. It is like adding red paint with white paint. The shade of desirable pink is personal.

Also, we have little history to study. A combined SIP in both indices can only be studied from Dec 2002.  This just means 90 10-year rolling return data points.

Rolling 10-year SIP of Nifty 50 and Nifty Next 50 from Dec 2002 to April 2020
Rolling 10-year SIP of Nifty 50 and Nifty Next 50 from Dec 2002 to April 2020

If we compare a Nifty-only portfolio and a Nifty Next 50-only portfolio, notice that the NN50 has sometimes outperformed significantly, but that drops down to NIfty levels. It is amusing that a highly volatile index like NN50 has outperformed the N50 during the Feb-Mar 2020 market crash! That is an indication of how overvalued the Nifty was: Market crash destroys two-year imbalance among Index stocks

This should not be used as an indicator to go overboard on NN50 allocation. The portfolio drawdown is not shown here and a simple inspection of the NN50 price movement is enough to indicate that it can fall big.

It should be clear from the above date that gradually adding NN50 to N50 would only increase the returns for the time period studied (not indicative of future performance)

Rolling 10-year SIP of portfolios with different levels of Nifty 50 and Nifty Next 50
Rolling 10-year SIP of portfolios with different levels of Nifty 50 and Nifty Next 50

This is the relative volatility of 100% NN50 and 50% NN50 + 50% N50 portfolios compared with a Nifty-only portfolio. The monthly volatility over a 10-year period is measured.

Relative volatility or beta of 100% Nifty Next 50 and 50% Nifty Next 50 portfolios compared with Nifty-only portfolio
Relative volatility or beta of 100% Nifty Next 50 and 50% Nifty Next 50 portfolios compared with Nifty-only portfolio

The 100% NN50 portfolio has been almost 25% more volatile than a 100% N50 portfolio. Investing while adding NN50 should expect at least this excess volatility and can suitably weight it with their own exposure.

Please note that these portfolios have been rebalanced annually and associated taxes and loads are not factored in. Systematic rebalancing is crucial to reduce risk.

Do share if you found this useful

How to profit from content writing: is our new ebook for those interested in getting side income via content writing. It is at available at a 50% discount for Rs. 500 only!
Did you know? We have more than 900+ videos on YouTube to explore! Join our YouTube Community!

Use our Robo-advisory Excel Template for a start-to-finish financial plan!

Join our courses in exclusive Facebook Groups!

  • 520+ members are now part of our new course: How to get people to pay for your skills! (watch 1st lecture for free). Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show how to achieve by showcasing your skills and building a community that trusts you and pays you!
  • Goal-based portfolio management! Join 2125+ members and get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment of Rs. 3000 only. No recurring fees! Life-long access to videos (10+ hours content)  in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps