Nifty Next 50 or Nifty Midcap 150: Which is a better bet?

If one really wants to take the passive fund route to get mid-cap (or similar) exposure, only then one should look towards choosing between the two

When it comes to passive funds, the Nifty 50-based large-cap index funds rule the roost and are the preferred choice for investors. But what about the universe beyond Nifty 50? For some time, Nifty Next 50 has been a favorite of sorts in the passive investing community. But now, there is another index that looks like a decent alternative in the beyond-Nifty 50 space. And that is the Nifty Midcap 150 index.

How does Nifty Next 50 differ from Nifty Midcap 150?

While the Nifty Next 50 is made up of 50 companies ranked 51-100 by marketcap, the Nifty Midcap 150 index consists of 150 companies ranked 101-250.

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But is it right to compare these 2 indices? Because if we strictly go by SEBI definitions, then Next 50 is made up of companies which technically are large-cap stocks (within 1-100 by marketcap). And Nifty Midcap 150, as the name suggests is made up of top-150 mid-cap stocks as per SEBI definition.

Why compare the two? The reason is that in terms of nature, return profile, volatility of stocks and comparatively larger impact costs, Nifty Next 50 behaves a lot like a mid-cap index (like Midcap 150) and a lot less like a large-cap index (Nifty 50/Sensex).

But as I wrote earlier in why Nifty Next 50 is a double-edged sword, the high return potential of Next 50 (compared to large caps) comes with higher risks. If we look at the broad historical market data, it will be evident that during bullish periods, Next 50 generally tends to do better than Nifty 50. But during market corrections, it also falls more sharply.

Also, given 150 stocks in the portfolio, the Midcap 150 index is a lot more diversified than the Next 50 index with 50 stocks.

Nifty Next50 vs Midcap150

For pure large-cap exposure, just go for Nifty 50 index funds. One can even look at Nifty 100 index funds which have an 85 percent allocation for Nifty50 and the remaining 15 percent for Nifty Next 50. But for simplicity and for those who don’t want too much volatility and are unwilling to take higher risks, picking Nifty 50-based index funds is sufficient.

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If one really wants to take the passive fund route to get mid-cap (or similar) exposure, only then one should look towards choosing between Next 50 and Midcap 150 index funds.

Over the past few years, Nifty Next 50’s return profile has become somewhat subdued compared to Nifty Midcap 150’s return outcomes. But there is no way to predict which of the two will do better in a given year. Of course, in a market rally that is fueled primarily by midcaps, the chances of Midcap 150 doing better are more. But if it’s a more large-cap driven rally, it’s possible that Next 50 (even with its inherent midcap nature) will do slightly better.

But for both, investors need to have the patience to live through down periods to benefit from strong periods which come once every few years or so.

Having said that, there doesn’t seem to be a need for both Nifty Next 50 and Midcap 150 in most investors’ portfolios. Even one of the two would be enough, given the similar return outcomes that both indexes deliver. But if one were to go by recent returns, then Nifty Midcap 150 has an upper hand and if paired with a large-cap index fund, then it allows allocation to a full (practically) investible mid-cap universe.

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And if you plan to have an active mid-cap fund along with a passive mid-cap fund, make sure to check for portfolio overlaps.

I must also mention here that if one is open to both passive and active investment strategies, it is always advisable to have a mix of passive and active funds in the portfolio. Large-cap exposure can be via Nifty 50-based index funds and mid and small-cap exposure can be via active funds as well if one is not really looking to go passive with either Next 50 or Midcap 150 index fund options. In any case, mid-cap investing requires a comparatively higher risk appetite and ability and intent to remain invested for longer time frames of five to seven years plus if need be.