If you believe in the power of passive investing, Nifty 50 funds would probably be your first choice. However, for investors looking beyond the top 50 companies of India, the Nifty Next 50 segment can be appealing. Ranked just below the Nifty 50 funds provide you with exposure to promising firms that may emerge as tomorrow’s leaders.
While you tap into a higher growth potential, Nifty Next 50 funds often come with higher volatility. In this blog, we have comprehensively discussed the risks and returns that define this equation.
Composition and sectoral diversification of Nifty Next 50 Fund
The Nifty Next 50 index funds are part of the Nifty 100. The composition of Nifty Next 50 is diverse, and includes emerging companies from industries like finance, industrials, consumer goods, healthcare, and energy.
When you compare mutual funds considering Nifty 50 and Nifty Next 50, you’ll see that the top 50 companies are heavily inclined towards large banks and tech giants. In contrast, the Nifty Next 50 companies offer a broader sectoral diversification. It spreads the risks across multiple industries.
This structure makes the index a pipeline for potential market leaders of the future.
Risk profile of Nifty Next 50 Funds
Investors must be aware of the risk profile of Nifty Next 50 funds.
1. Higher volatility than Nifty 50
Historical records reveal that Nifty Next 50 funds have shown higher volatility compared to their Nifty 50 counterparts. When the market is bullish, Nifty Next 50 often outperforms the top 50 companies as they are exposed to expanding companies. However, during market downturns, they also experience deeper corrections. This volatility makes them suitable for investors with a long-term horizon rather than those looking for short-term stability.
2. Beta is generally above 1
Generally, Nifty Next 50 funds carry a beta greater than 1. This implies, they react more strongly to overall market movements, whether it’s a bull run or a bear run. While this maximises returns in bullish markets, you may experience more losses in bearish ones.
3. Longer investment horizon
Considering the higher volatility, investors must choose Nifty Next 50 funds only if they have a horizon of over five years. The volatility tends to smooth out over long periods. As a result, emerging companies can benefit from the compounding potential to shine.
Return potential compared to other indices
Investors who are seasoned enough to endure the risks listed above also reap the benefits of putting their assets in Nifty Next 50 Funds.
1. Historical outperformance over Nifty 50
Nifty Next 50 often outperforms Nifty 50. This is due to its composition, which includes a mix of high-potential businesses that expand rapidly in favourable markets.
2. Higher CAGR
Within the Nifty Next 50, many companies evolve into blue-chip stocks. This transition brings a strong compounding potential over long horizons. Therefore, if you hold through market cycles, you can benefit from the future growth potential.
3. Transforms to large-cap status
As many companies within the Nifty Next 50 become large caps later, the index gets new entrants from time to time. This ensures that the index remains aligned with the evolving market landscape of India. Long-term investors, therefore, can capture the momentum of the next generation of corporate leaders in India.
Who should invest in the Nifty Next 50 Fund?
If you’re keen to create wealth through disciplined long-term investing, this index is for you. They also work well for investors who:
- Handle short-term volatility with confidence
- Prefer SIP investments to average out fluctuations
- Can remain invested for at least five years
- Want to invest beyond traditional large-cap companies
Conclusion
Nifty Next 50 mutual funds bring both growth and volatility. Suitable for investors with moderate risk tolerance, this index provides the opportunity to capitalise on the next wave of market leaders while demanding resilience to deal with fluctuations.
Stay in touch to get more updates & alerts on Magbuz! Thank you
