Investing in the Nifty Next 50: A large-cap index with mid-cap traits

Bhavana Acharya

That the Nifty Next 50 index is a great one to hold is old news. Using it as part of your portfolio, though, means that you need to understand how the index behaves. Why? You would think that being made up of large-cap stocks, it would be akin to holding a large-cap fund or index. On the contrary, the Nifty Next 50 behaves more like a mid-cap play than a large-cap one.

On the basis of a variety of metrics, the Nifty Next 50 has more similarities with the Nifty Midcap 100 than the Nifty 100. Here’s more, plus how you can use the index in your portfolio. Do note that the TRI indices have been used throughout in this analysis.

Loss probabilities higher

The one characteristic about mid-caps is that they soar far higher than large-caps during market upswings and crash much more in corrective periods. Now, consider the past decade.

The Nifty 50 and the Nifty 100 slipped into losses 22 per cent of the time when looking at one-year returns. The Nifty Next 50, though, suffered losses 28 per cent of the time. The Nifty Midcap 100 was loss-making 34 per cent of the time. Going further back to 15 years also shows a similar trend.

And not just that. The extent of the loss in the Nifty Next 50 is also larger. That is, the losses in the Nifty Next 50 have been more on an average than the Nifty 50 or the Nifty 100. Therefore, in terms of loss tendencies, the Nifty Next 50 deviates a good bit away from the main large-cap indices.

The Next 50’s loss characteristic shows up in downside capture as well. Downside capture is measure that reveals how much one index (or fund) falls in comparison to a benchmark index. That is, it shows the proportion of the benchmark’s loss an index captures.

Take the Nifty 50 as the main market indicator. Then take the period from 2009 to date and all the times the index has been loss-making on a three-month period. The Nifty 100 index falls just as much as the Nifty 50 does. But the Nifty Next 50 falls 4 per cent more on an average than the Nifty 50. That’s very similar to the broad-market Nifty 500, which falls 6 per cent more than the Nifty 50.

Pull this out into a longer one-year period, since short-term market movements can even out. Here, the Nifty Next 50 fell 13 per cent more, on an average, than the Nifty 50. The Nifty Midcap 100 fell 20 per cent more than the Nifty 50, on an average.

Volatility higher

Volatility measures how much returns fluctuate. Midcaps and small-caps, of course, top the volatility charts. But the Nifty Next 50 is similar to the Nifty Midcap 100 on the volatility metric. Across different timeframes, the Nifty Next 50’s return deviation is closer to the Nifty Midcap 100 than the Nifty 100 or the Nifty 50.

But upside also higher

However, this volatility also means that when the Nifty Next 50 rises, it thoroughly eclipses the Nifty 100. Consider one-year returns, just as in the section above. In all the times that the Nifty 50 gained, the Nifty Next 50 gained 33 per cent more on an average. That’s better than even the Nifty Midcap 100. The average gain the Nifty Next 50 clocked was a good 30.8 per cent compared to the Nifty 100’s 20.6 per cent.

And this is where the benefit of holding the Nifty Next 50 comes in. Despite its volatility and higher loss tendencies, the strong performance it manages during upswings takes overall returns much higher. This characteristic is thanks to the Next 50 being a catchment of sorts for stocks growing into the large-cap category from being mid-caps. During rallying markets, the bigger mid-cap stocks can clock very strong gains and move into the large-cap basket and into the Next 50. At the same time, the index also holds those stocks that have dropped out of the main Nifty 50, which have an effect similar to getting into some under-valued stocks.

Given that these indices are market-cap weighted, the Nifty 100 is driven almost entirely by the Nifty 50. This leaves the Nifty Next 50 very different from both the Nifty 50 and the Nifty 100.

Investing in the Nifty Next 50

So how can you use the Next 50 in your portfolio? One, the index will fall under the aggressive part of your portfolio, which you use to drive overall returns higher. Two, it should not be considered as a substitute for large-caps, because it does not fit the stable, moderate risk, lower volatile need that large-caps do.

Three, for the same reason, avoid putting away a large chunk of your portfolio in the index despite its attractive returns. You can pair it with large-cap funds or the Nifty 100 or the Nifty 50. Remember, despite the higher returns, there are times where the Next 50 may fail to match up to the Nifty 100 – recent returns, for example, have the Next 50 lagging. Also note that holding the Nifty 50 and the Next 50 is not the same as holding the Nifty 100.

Conservative and moderate-risk investors can use this index instead of midcaps, or blended with a small allocation to mid-caps, for the high-return component and still keep risks in line. For aggressive investors, the Nifty Next 50 is a useful option to increase a portfolio’s return potential without delving excessively into mid-caps and small-caps.

(The writer is Co-founder, PrimeInvestor)