Should I switch my SIP in Nifty Next 50 to Nifty 50?

Published: August 15, 2020 at 11:16 am

“My SIP in Nifty Next 50 over the two and a half years has underperformed a Nifty SIP. Should I switch my SIP from Nifty Next 50 to Nifty 50?” We discuss this question posed by Nirmal.

The Nifty Next 50 is a curious index. Technically it is part of the large cap stock universe of the top 100 stocks by free-float market capitalization. However, inspecting its volatility and impact cost would make one realise it behaves more like a mid cap index! See Warning! Nifty Next 50 is NOT a large cap index! and Even “large cap” stocks are not liquid enough! Can you handle this?

Noticing that no active fund was benchmarked to the Nifty Next 50, we had noted in Aug 2016 and May 2017 that it is a hard-to-beat index. See Nifty Next 50: The Benchmark Index That No Mutual Fund Would Touch?! And Evaluating the Nifty Next 50 as an Index Fund.

The increased interest in Nifty Next 50 a couple of years ago and Nifty/Sensex more recently has probably been for the wrong reasons. Nifty Next 50 rose to be a “five-star index” in 2017-8 and Nifty/Sensex funds moved up the returns ladder post-Feb 2018 prominently due to a strong market imbalance: Return difference of Nifty 50 vs Nifty 50 Equal-weight index at an all-time high!

An investor switching from active funds to passive funds based on this single past performance data is probably doing so for the wrong reasons. The only way a switch to passive will last is when the investor recognises the difficulty in staying invested in the “best funds”. If the switch is done looking at the star rating of index funds/ETFs or their recent performance then it would be another case of succumbing to the past performance trap.

The poor performance of active funds is not a “temporary or new phenomenon”. Well before the onset of this market imbalance (few stocks in the Nifty moving up while the rest of the market is down), consistent active fund outperformance was nothing more than a coin toss (50% chance): Poor performance of active mutual funds: Is this a recent development?

A switch from active to passive funds if done on the basis of recent performance alone may not be a happy one. There will always be some funds that outperform Nifty or Nifty Next 50 at any point in time and reports such as this could be unsettling to such investors: After the market crash, 80% of active large cap funds outperform Nifty and Nifty 100.

Nifty Next 50 vs Nifty 50 SIP Performance

In the present case, it is the Nifty 50 outperforming the Nifty Next 50. Listed below are the trailing SIP returns Of Nifty 50, Nifty Next 50 and Nifty 100 TRI indices as on Aug 13th 2020.

DurationNIFTY 100 – TRINIFTY NEXT 50 – TRINIFTY 50 – TRI
1Y12.113.412.0
2Y4.23.64.3
3Y4.01.14.5
4Y5.83.06.3
5Y7.35.57.6
6Y7.36.67.4
7Y9.310.59.1
8Y9.911.69.6
9Y9.711.49.4
10Y10.512.910.1
11Y10.212.49.7
12Y10.112.49.7
13Y10.412.510.0
14Y11.213.010.8
15Y11.913.711.5
16Y12.715.012.6

Notice that a SIP in Nifty Next 50 has underperformed a Nifty SIP for the last 6,5,4,3 and 2 years with an improvement in performance over the last year.

Therefore considering this, the market imbalance over the last couple of years and the long -term track record of the Nifty Next 50 (both risk and reward), a SIP in Nifty Next 50 can be continued.

Please note that the Nifty 100 returns can be recreated with 10-15% of Nifty Next 50 (approximately) and the rest from Nifty 50. The exposure of Nifty Next 50 in your portfolio will decide your risk management strategy. If you hold only 10-20% of it then regular annual rebalancing as per an asset allocation plan between equity and debt. See: Should I rebalance between Nifty and Nifty Next 50 systematically?

Those who hold more of Nifty Next 50, say 40% or more may consider tactical shifting of gains from Nifty Next 50 to debt via this method: This “buy high, sell low” market timing strategy surprisingly works!

Nifty Next 50 is a volatile index and will be prone to long periods of poor performance. If you find this stressful, you can either reduce your allocation or invest only in the Nifty.  You can also consider this fund as long as you do not mind the higher expense ratio: Axis Nifty 100 Index Fund Impressive AUM but is it expensive?

Additional Resources for Nifty Next 50

  1. Do not expect double-digit returns from Nifty Next 50 index funds!
  2. Nifty Next 50 stocks with weights for August 2020
  3. Which Nifty Next 50 index fund has the lowest tracking error?
  4. Nifty + Nifty Next 50: What is a good mix?
  5. Only these 3 midcap mutual funds have beat Nifty Next 50 consistently!
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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 topics of money management. 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 on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
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