Are Nifty Smart Beta (strategic) Indices better than the Nifty Next 50?

Published: April 24, 2018 at 12:07 pm

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In an earlier post where we saw that the Nifty Next 50 (NN50) is much more riskier than Nifty 50 (N50) and Nifty 100 (N100), we asked, “Is there any index that has offered better returns at lower risk than the NN50?”. Two promising candidates were discovered: nifty 100 equal weight (N100EW) and Nifty Midcap indices although we still need more data to say anything for sure. We continue our search among the Nifty strategic or smart beta indices. We shall do this in two parts with this being the first

If you have not read the previous post, this one may not make much sense and I strongly urge to head over to: Warning! Nifty Next 50 is NOT a large cap index!

What are smart beta indices? Normally indices are constructed based on the market cap of stocks. A strategic or smart beta index is one that is constructed based on low or high volatility, risk-adjusted returns, dividend yield etc. So smart beta index is one that is constructed by “active selection”. You can combine both passive investing and active selection.

The method:  We will consider both rolling returns (higher is better duh!) and rolling standard deviation (a measure of volatility – lower is better) over a ten year period and use the Nifty 50 (N50) and the Nifty Next 50 as dual benchmarks. As mentioned above, our goal is to answer Is there any strategic index that has offered better returns at lower risk than the NN50? Before we begin, a gentle reminder: high risk does not mean high return and low risk does not mean low return. Note: all indices below refer to total return indices obtained from and via the Nifty Valuation Analyzer with PE, PB, Div Yield, ROE, EPS of 21 NSE Indices

1 Nifty-High Beta 50 

Beta is a measure of relative volatility with respect to an index, as opposed to the standard deviation which is a measure of absolute volatility. A stock which is more volatile than an index will exhibit a high beta. This could, in turn, increase the cost of equity and lower the alpha. The High Beta 50 is selected from the top 300 companies (arranged by the free-float market cap) and by choosing 50 stocks that have the highest beta using last 1Y trailing returns. For more details please see my earlier post on why such stocks are unattractive: Nifty High Beta 50: an unsmart beta strategy

Over 5 years (the numbers on the top right refers to no of data points considered)

Over 10 years

If I wanted a list of stocks to avoid, I will first look at the NIfty High beta 50! It should be obvious that this index offers high risk and low reward.

Nifty low volatility 50

The Low volatility 50 is selected from the top 300 companies (arranged by the free-float market cap) and by choosing the ones with the lowest standard deviation of daily returns (volatility). The stocks with the lowest volatility has the higher weight. I had earlier shown how impressive this index has fared against Quantum Long Term Equity: Nifty Low Volatility 50: A Benchmark Index to watch out for.

Over 5 years

Over 10 Years

Is that impressive or what? Low volatility is a long-term winning strategy – in investing and in life!

Nifty low volatility 30

This has 30 stocks in NIFTY 100 with the lowest volatility in last one year. The stocks with the lowest volatility have the higher weight.

Over 5 years

Over 10 years

Again that is fantastic!

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Nifty Growth Sectors 15

Sectors that exhibit PE and PB on average greater than the Nifty are first selected. Then, top 50% market cap of all such stocks is shortlisted and ranked in terms of EPS growth. Top 15 in the list forms the index.

Over 5 years

nifty growth sector 15Too soon to say anything.

Nifty Alpha 50

Alpha is a measure of out-performance with respect to a risk-free rate and correlation with a given index. The alpha 50 is an index of 50 stocks that has the highest alpha among the top 300 stocks in terms of market cap is selected.

Over 5 years

Over 10 years

As expected searching for alpha is a high-risk, high reward strategy. Is that what you want though?

Nifty 50 Value 20 (NV20)

I had written about this in some detail before: Nifty50 Value 20 Index (NV20) as a mutual fund benchmark. The NV20 comprises of 20 stocks from the Nifty 50 with low PE, PB, high ROCE (return on capital employed) and Div Yield. You can refer the above post for the exact ranking procedure. As shown previously, I think this makes a very good large-cap mutual fund benchmark.

Over 5 years

Nifty Quality 30 (NQ30)

This is a portfolio of 30 stocks that show signs of a “durable business model”. A quality score is assigned after considering ROE, Debt/Equity and Profit After Tax for the last three financial years.

Over 5 years

Pretty good, but still not enough data.

Nifty Dividend Opportunities 50

Top 50 stocks ranked in terms of dividend yield from the top 300 stocks (market cap) make up this index. Probably suitable as a benchmark for dividend yield funds.


Most of the NIfty strategic indices are promising and if the actual traded history is favourable, they can be good replacements for NN50. Can they be the holy grail of investing? Higher reward at lower risk? Only time will tell. As of now, much of the historical data is only based on projections and this cannot factor in actual market forces (eg. intraday trading). So it is too early to tell. However, one thing is clear that if active funds are benchmarked against these indices, they may find the going pretty tough!  A few of these indices are available as ETFs from Edelweiss, ICICI etc. Stay away from them!Choose only if available as an index fund or you will have tough time exiting such ETFs.

We are not done yet! Stay tuned for Nifty stategic indices vs Nifty Next 50 part 2

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  1. Hi Pattu Sir,

    Are there any funds available in the market that follow the smart beta indices as the benchmark (especifically Nifty low volatility 50)?

    On a side note, I saw one ETF – Kotak NV 20 ETF. But you have said that do not invest in ETF but in index funds.


  2. Hi,
    These stats are very informative and educational but how will we incorporate this knowledge into our investing! As I searched and there are no Nifty Low Volatility 50 indexes in the market. Can we replicate the result using N50 and NN50 blend, as these are the only indexes available in India.

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