Selecting between the Nifty 50 and the Nifty Next 50 Index Funds

Choosing between Nifty 50, Nifty Next 50, and Nifty 100 index funds might be difficult. Continue reading to learn more.

Globally, passive investment is a multi-trillion-dollar sector. Even in India, it has begun to acquire traction, particularly in the large-cap category. This is due to its low-cost structure and risk-reward ratio being close to that of the index. Furthermore, the Employee Pension Scheme's investment in equities through exchange-traded funds (ETF) has increased five times in the last six years.  

The assets under management (AUM) of passive investments have increased as a result. As every investor seeks to board the equities bus due to its recent outstanding returns, asset management companies (AMC) have developed a plethora of passive products that track various indices. 

The National Stock Exchange (NSE) alone includes around 25 index funds and over 30 ETFs in the large-cap category. The vast majority of large-cap based passive funds track the Nifty 50 or Nifty Next 50 Total Returns Index (TRI). As a result, it is difficult for investors to pick between the two. 

In order to comprehend this, we examined the performance of both indices in terms of returns as well as risk. The study period runs from December 2011 to November 2021. 

For the above-mentioned study period, we estimated one-year, three-year, and five-year rolling returns on the Nifty 50 TRI and Nifty Next 50 TRI. Furthermore, to determine its consistency, we took the median of all the instances. So, in terms of return, Nifty Next 50 TRI outperforms Nifty 50 TRI hands down. This is one side of the coin; now consider the other side, which is risk. 

For examining the risk component of both indexes, we used risk indicators such as standard deviation, downside deviation, maximum drawdown, Sharpe ratio, and Sortino ratio. As shown in the table above, the Nifty 50 TRI outperforms the Nifty Next 50 TRI in terms of risk as evaluated by standard deviation, downside deviation, and maximum drawdown. 

However, Nifty Next 50 TRI beats Nifty 50 TRI in terms of risk-adjusted returns as evaluated by the Sharpe and Sortino ratio. As a result, if you are a conservative investor with a low-risk appetite, the Nifty 50 TRI is a better option for you, while others should consider the Nifty Next 50 TRI. That being said, it is smart to have a mix of the two, as a slight increase in risk can help you get higher returns than the Nifty 50 TRI alone.