Can I start Index investing with 50% Nifty 50 and 50% Nifty Next 50?

Published: October 26, 2018 at 9:23 am

Last Updated on

As readers may be aware, over the last few months I have presented evidence that the Nifty Next 50, Nifty 100 and Nifty 100 Equal Weight indices are hard to beat and only about half the funds in any given category manage to do so.  However, the Nifty Next 50 is extremely volatile; there are no index funds tracking Nifty 100; the two funds tracking Nifty 100 Equal Weight of are low AUM. Therefore many readers have suggested or asked, Can I start Index investing with 50% Nifty 50 (N50) and 50% Nifty Next 50 (NN50) Index funds?  Let us find out.

In particular, I would like to thank Sanjay Dixit who first suggested that I test this Nifty Blend (50% N50 +50% NN50) and Ravikiran Suryanarayana who posted on FB group Asan Ideas for Wealth that this blend has outperformed many active funds.

Can I start Index investing with 50% Nifty 50 and 50% Nifty Next 50?

So let us look at this problem step by step. First, I compare Nifty 100  (N100) with Nifty 100 Equal Weight (N100EW). Then I compare the Nifty blend with  N100 and N100EW. After that, we shall consider the results of a SIP in these indices from April 2006.

Nifty 100 vs Nifty 100 Equal Weight

These are 614 10-year rolling return data points of each index compared and in the bottom panel, the rolling risk (standard deviation) is plotted.

Nifty 100 vs Nifty 100 Equal Weight

Clearly, the N100EW offers a bit more risk with a bit more return, which is fine. The question now is, if I choose 50% N50 + 50% NN50, which index will I be emulating: N100 or N100EW?

50% Nifty 50 and 50% Nifty Next 50 vs Nifty 100

We shall now look at similar graphs as above for 5Y and 10Y.

Five years50% Nifty 50 and 50% Nifty Next 50 vs Nifty 100 5 year data

Ten years

50% Nifty 50 and 50% Nifty Next 50 vs Nifty 100 10 year data

The Nifty blend is clear more rewarding but also a bit more volatile than N100.

50% Nifty 50 and 50% Nifty Next 50 vs Nifty 100 Equal Weight

Five years

50% Nifty 50 and 50% Nifty Next 50 vs Nifty 100 Equal Weight 5 year data

Hate ads but would like to support the site? Subscribe to our ad-free newsletter and get beautifully formatted full articles delivered to your inbox!

Ten years

50% Nifty 50 and 50% Nifty Next 50 vs Nifty 100 Equal Weight 10 year dataI think  50% Nifty 50 and 50% Nifty Next 50  is a good proxy for Nifty 100 Equal Weight.  The advantage with the blend is that you have your money split into two funds and this is psychologically a lot more comforting.  Those who want less volatility can reduce NN50 exposure.

The 50% Nifty 50 and 50% Nifty Next 50 blend index analyzed above is based on a daily rebalanced index. This is a bit of an overkill as usually composite indices are rebalanced only monthly.

normalized nifty indices

So we need to look at an actual investment and check if the blend will work. The simplest way is to consider SIP investments from April 3rd 2006 onwards: 146 months.

IndexXIRR
N5010.33%
NN5014.11%
N10010.96%
N100EW11.36%
Nifty blend index12.29%
Nifty blend (weighted)12.22%
Nifty blend (combined)12.35%

Here:

  • Nifty blend index refers to the daily rebalanced composite index used in the rolling return analysis above
  • Nifty blend (weighted) refers to 50% return of N50 + 50% return of NN50 SIPs
  • Nifty blend (combined) refers to the combined XIRR of N50 and NN50 SIPs

The agreement among these three is fairly close. This reiterates the earlier observation that Nifty blend is a good proxy for N100EW and it has the potential to outperform N100.

This means that the outperformance results of N100 and N100EW published earlier automatically apply to the Nifty blend portfolio as well! See:

How to start index investing with 50% Nifty 50 and 50% Nifty Next 50

Stay away from ETFs. Choose two low-cost index funds that track the N50 and NN50 and invest equally in each: What is the best way to invest in Nifty Next 50 Index?

Rebalance the portfolio once a year. We now have enough evidence to suggest that both young and old investors can start index. Young investors can quickly start increasing exposure to these indices and older investors can do so more gradually.

If you don’t want to do so, then consider an aggressive hybrid or dynamic asset allocation funds where the higher expense ratio is justified. However, you will have to worry about fund manager risk.

Read more:

Do share if you found this useful
Hate ads but would like to support the site? Subscribe to our ad-free newsletter and get beautifully formatted full articles delivered to your inbox!

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

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. We operate in a non-profit manner. All revenue is used only for expenses and for the future growth of the site. 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 kind of paid articles, promotions or 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 investingThis book is meant to help you ask the right questions, seek the right 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 a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when traveling, how traveling 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 Apps for your Android Phone

Comment Policy

Your thoughts are the driving force behind our work. We welcome criticism and differing opinions.Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

12 Comments

  1. Awesome analysis. Thanks for sharing this Sir. I have only one request here to add another column to the table where you compare indices on XIRR for SIP investments which mentions their standard deviation. It will help readers to compare the extent of volatility to expect for a particular index and its returns.
    I believe you already have the resources to get this data. It would be of additional help for us all if you can add this.
    Thanks again for this helpful post.

  2. Sir this is an amazing analysis which make things crystal clear. Hats off to your perseverance in continuing to analyse which is so beneficial to us. You’re a rare gem. Please accept my humble obeisance.

  3. This is good, will be interesting to compare N50+NN50 with Quantum FoF (or some other FoF) check the returns. Have read somewhere that Quantum FoF gives exposure to 250 stocks with Large, Medium and Mid cap exposure.

  4. Very useful analysis dear Professor.

    Not many people can come to such a conclusion and absolution on their own, I am certainly one of them and you are helping us there, you are making our investing journey easy, a million salutations for that.

  5. Your analysis is very good for long term.Recently I read some where that @12% return for 30 years your wealth will increase many times.In short term it’s highly volatile.

  6. Hello Sir,
    Thanks a lot for the detailed analysis. For an aggressive investor, can we change the proportion to 60-65% NN50 – 40-35% N50 and do the re-balancing when the goal is nearer. I would request you to consider this analysis for a future date. Thanks again for this detailed post.

  7. Sir,
    Thanks for your nice blog comparing blend index with nifty Equal weight Index.
    I am fan of Nifty Next 50,
    I am Investing in both nifty index via daily STP.

  8. Actively Managed fund tries to beat benchmark and we choose funds beating 75% or more OR let it be 45% or more, thanks to monthly screener. We get chance of better return anyway, than index returns.

    If this is the case, then why do we need to invest in index fund, please clarify

  9. Actively Managed fund tries to beat benchmark and we choose funds beating 75% or more OR let it be 45% or more, thanks to monthly screener. We get chance of better return anyway, than index returns.

    If this is the case, then why do we need to invest in index fund, please clarify

  10. hi sir,

    why do we need to rebalance?

    Suppose i invest 1 lakh this year equally in both.

    after 1 year suppose, 50k in N50 became 60k, whereas NN50 became 35k.

    So now i will invest more in NN50 and less in N50 so they become equal. Isn’t this peanalizing the good performer and rewarding the one which is not doing well?

    Why do we need to rebalance at all, just invest equally in all the SIPs all the time? Will that be any issue?

    Thanks,

Leave a Reply

Your email address will not be published. Required fields are marked *