You believe active investing is overdone. That fund managers are overrated. They use ill-structured index benchmarks to show alpha where none exists. In the garb of this false alpha, they rip investors off with the exorbitant fees. For you, index funds and ETFs are the God’s gift to investors and his Avatar is none other than John Bogle, Founder of Vanguard.
Fair enough! I only have good news for you. An investing opportunity which is not so popular with investors yet and that’s why it deserves the space here today. Heard of Nifty Next 50 index?
I am sure you are aware of the Nifty 50 index, one of the most tracked market indices. Nifty 50 comprises of some of the largest, most liquid bluechips in the entire stock market. The selection to this index is subject to various criteria. One of the key criteria is the free float market capitalisation or the number of shares publicly available to buy and sell (and not locked in with promoters, etc.).
Then there is another index, which again you might not have heard but can relate to. It is the Nifty 100 index. Same criteria as Nifty 50 but applied to the top 100 companies.
Now, what if you take away the Nifty 50 from Nifty 100?
You are left with 50 stocks and an index called the Nifty Next 50, also known as the Junior Nifty.
Think of it as group of companies that are not the largest but large enough. They are not there yet but getting there. Some or many of these will go to become a part of the Nifty 50 at some point in time.
The Nifty Next 50 is a sweet spot for investors.
This is a motley group of companies across sectors, most of them fairly large along with a sprinkling of mid cap companies.
In contrast, Nifty 50 is all large cap, in fact it comprises of the Giant companies in the economy.
Not just that, Nifty Next 50 as a portfolio structure is quite different from Nifty 50.
Here are a few facts for you to understand this better.
Source: NSE white paper; Sector weightage as of May 2017.
In terms of sectoral composition, Nifty Next 50 is a highly diversified index.
As mentioned before, it is a mix of fairly large, large and not so large companies. The size of the largest company as per the above cited white paper from NSE is about Rs. 32,000 crores. This is quite likely to be the smallest company in Nifty 50.
As per our own workings at Unovest, out of 500 companies 85 companies make up for 70% of the market capitalisation. Next 20% is with about 200+ companies. The rest 10% with the others. You get the perspective.
Even the average weightage to a stock in the Nifty Next 50 index is less than 5% with an average weightage of the Top 10 holdings at about 3%.
For investors who believe in the passive style, Nifty Next 50 offers the best possible opportunity, without the fund manager risk and exorbitant expenses.
How can you invest in Nifty Next 50?
You can invest through an index fund or an exchange traded fund (ETF). The investment objective of such funds is to replicate the index to the maximum extent possible, that is to invest in the same stocks, in the same ratio as the index holds.
Please note the job of an index fund is not to outperform the underlying index. They just copy it and make periodic adjustments to mirror the index.
Read more: Active vs Passive Investing – a primer
Here are a few options to invest in the Nifty Next 50.
Source: Fund factsheets for Nov 2017 for direct plans
SBI and UTI are others with ETF offerings based on the Nifty Next 50 index.
Tracking error is the margin of underperformance of an index fund from the actual index. There are 2 big reasons for error or gap. One is the expenses of the index fund. The other reason is that the index fund doesn’t invest 100% of its money in tracking the index. It maintains some of its holdings in cash to deal with short term requirements.
For reference, the lower the tracking error the better it is.
You are not really spoilt for choice but there are quite a few to pick and choose. Amongst the choices, Reliance ETF Junior Bees stands out with a lowest expense ratio and lowest tracking error.
Note: To buy an ETF, you need a demat account.
How do the Nifty Next 50 index funds compare to actively managed funds?
Good question and an obvious one too.
Frankly, given the way markets are running up and resultant gains to the investors in active funds, this is probably a bad time to even talk about an index / passively managed fund, but I took a chance. It has turned out to be a discovery.
As for performance, a comparison would make sense right?
With the multi cap fund varieties of the same fund house?
Let’s do it.
Up next is Reliance ETF Junior Bees vs Reliance Equity Opportunities Fund.
Source: Unovest; Regular plans data is used for longer period comparison.
The numbers say it all, I guess.
What’s your view? Where would you invest your money? An actively managed multi cap fund or the Nifty Next 50 index fund / ETF. I look forward to your views.
Note: None of the above is investment advice. I do not hold any of the funds mentioned in this post.