Last Updated on August 22, 2022
Investors can create a simple, minimalistic two-fund equity mutual portfolio by investing in a Nifty index fund and a Nifty Next 50 index fund. While one should rebalance between asset classes, for example between equity and fixed income, in a standard two-asset class portfolio, should one rebalance between Nifty and Next 50?
If you are wondering how NIfty and NIfty Next 50 funds are that one needs for an equity portfolio, see: Combine Nifty & Nifty Next 50 funds to create large, mid cap index portfolios. If you want help selecting these index funds see: Which Nifty Index Fund has the lowest tracking error? and What is the best way to invest in Nifty Next 50 Index? and Which Nifty Next 50 index fund has the lowest tracking error?
To answer yes or no to the titular question we can only conduct a backtest from Dec 2002. We can make some observations without any testing. Although Nifty Next 50 (NN50) is significantly more volatile than the NIfty -in fact NN50 is not a large cap index, never mind what SEBI thinks – there is a good deal of correlation between their movements.
Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
That is if one falls/rise, the other tends to fall/rise – although the movement from Feb 2018 has been frustratingly inhomogenous – this means the benefits of rebalancing if any is likely to be small. It is still incumbent upon us to test it out.
We shall look at seven and ten-year SIPs in the Nifty and Nifty Next 50 with a 50:50 allocation. This is a mere 128 7-year runs and 92 10-year runs. Hardly conclusive, but we will have to work with what we can.
Note: this only considers a 100% equity portfolio. The benefit of rebalancing between equity and debt is indisputable as discussed earlier: Forget tax and exit loads, this is why your portfolio should be rebalanced each year. If you need additional help, consult, How to Rebalance Your Investment Portfolio and When should I rebalance my portfolio?
So if you hold Nifty and Nifty Next 50 along with fixed income, you anyway be rebalancing between fixed income and both equity funds. We are only considering if an additional “reset” between the two equity funds is necessary for this article.
For a 50% Nifty and 50% Nifty Next 50 portfolio this is max and min variation in NN50 asset allocation over 7 and 10 years. That is, for each of those 128 7-year runs, the max NN50 allocation over the 7x 12 months and the min allocation is plotted
Notice that the deviation is not significant. This means that the impact of rebalancing between Nifty and Nifty Next 50 is insignificant. This can also be seen from the standard deviation (volatility) and max drawdown (extent of max fall from peak).
There is no difference in the returns (XIRR) as well.
Even for a 70% Nifty 30% Nifty Next 50 allocation, the deviation in asset allocation is not significant. The other metrics like MAx drawdown and standard deviation also do not vary much as above.
What does this all mean? All investors need to do is to rebalance systematically (once a year) between equity and debt. There is no need for an additional rebalance bet Nifty and Nifty Next 50. Suppose the portfolio has 70% nifty and 30% Nifty Next 50. If Rs. 1000 needs to be added to removed from equity to debt or vice versa, then Rs. 700 can be the contribution from Nifty and Rs. 300 from Nifty Next 50.
In other words, the debt to rebalancing can be done without disturbing the Nifty Nifty Next 50 weights. If at the time of rebalancing there is a significantly disparity in their weight then it can be “reset” as well -which is a natural thing to do. For example in the last couple of years, Nifty has moved up and NN50 down. So at the time of equity-debt rebalancing, more (or all the) profit can be removed from Nifty to debt.
Further considerations: We have already seen tactical asset allocation between equity and debt (gilts) using double moving averages has worked well. Would tactical asset allocation between Nifty and Nifty Next 50 make a difference? We shall consider this in a future post.
🔥Enjoy massive discounts on our courses and robo-advisory tool! 🔥
Use our Robo-advisory Excel Tool for a start-to-finish financial plan! ⇐ More than 1000 investors and advisors use this!
New Tool! => Track your mutual funds and stocks investments with this Google Sheet!
- Follow us on Google News.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Join our YouTube Community and explore more than 1000 videos!
- Have a question? Subscribe to our newsletter with this form.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3000 investors and advisors are part of our exclusive community! 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! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! 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 you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (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
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and 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 300 (instant download)