Last Updated on April 6, 2024 at 7:18 am
We compare the rolling returns of Nifty 50, Nifty Next 50, Nifty Midcap 150 and Nifty Smallcap 250.
Returns for a financial instrument that fluctuates can be calculated in two ways:
Point-to-point returns: The effective annual compounded growth rate (CAGR) is calculated between two dates. You can calculate CAGR for your mutual fund and compare it with its benchmark from Jan. 1st to Dec. 31st, or you can calculate CAGR for the year to date (last 365 days). So the start and end date can be anything convenient for us.
What we need to know before choosing a mutual fund, or more importantly before deciding to quit a mutual fund scheme, is how consistent is the fund’s performance when compared with its benchmark. To do this, we need to use Rolling returns.
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Calculating Rolling returns: To calculate rolling returns, we must again decide on start and end dates. Let us say this is a 10-month period. We then calculate the percentage change in the fund’s NAV from day 1 (start date) to day 7 (weekly return or IRR). We then calculate the weekly return from day 2 to day 8, day 3 to day 9 and so on until we reach the last date. We repeat this exercise for the benchmark as well.
If all the dates in our NAV and index history are identical, we could determine how many weeks the fund has outperformed its benchmark. If the fund has beaten its benchmark 75% of all available rolling returns, it could be rated high! This is the basis of our monthly equity mutual fund performance consistency screeners. Those who wish to generate graphs like the ones shown below can use the mutual fund analysis tool that is part of the freefincal investor circle.
Five-year rolling returns
The five-year return of Nifty Next 50, which has recently underperformed Nifty 50 for the longest time in its short history, seems to be inching towards recovery.
Only in the last couple of years has the mid cap index outperformed the Nifty Next 50. How long would this last?
The small cap index has typically underperformed the mid cap index and only recently moved past the Nifty Next 50. I will not be surprised if this is temporary.
Ten-year rolling returns
Over ten years, the Nifty Next 50 has just about managed to keep its head above Nifty 50. From time to time, the outperformance vanishes and then increases.
The recent surge in mid cap indices is more apparent in the above graph. This suggests that Nifty Next 50 has become less volatile than the mid cap index. Let us see how things pan out in future.
The observations made above over five years also hold true over ten years. Readers can now perhaps appreciate why we insist on benchmarking active small cap funds with midcap 150 and not small cap 250: Why are you comparing Small Cap Mutual Funds with a Mid Cap Index?!
- Has Nifty Next 50 become increasingly large-capish due to higher market participation? (See our earlier report: Warning! Nifty Next 50 is NOT a large cap index!).
- Does this mean the reward for holding Nifty Next 50 (considering the risk taken) would be lower in the future?
- Will the mid cap index continue outperforming Nifty Next 50 (with higher risk)?
As of now, we need more time for such trends to establish. We shall continue monitoring these indices.