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SBI Nifty Next 50 Index Fund review: Should you invest in the NFO?

The Nifty Next 50 is not as heavily exposed to banking and financials, and also allows investors to participate in more sectors

May 06, 2021 / 09:54 AM IST

SBI Mutual Fund (SBI MF) has rolled out a new index scheme. Called the SBI Nifty Next 50 Index Fund, the NFO (new fund offer) will be open for investors till May 11, 2021.

 The scheme

The scheme will be passively-managed, making investments in companies that represent the set of largest listed companies in India, outside of the Nifty 50 index.

The Nifty 50 index comprises bluechip companies, most of which are leaders in their industries and command the largest market caps among the listed firms.

On the other hand, companies in the Nifty Next 50 Index carry the potential of turning into industry leaders and transitioning into a Nifty 50 company over the course of time.

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 What works

The companies in the Nifty Next 50 Index belong to the next rung of the largest listed companies, which are largely expected to be run by strong and credible managements. As these can turn into industry leaders, such companies can deliver stronger growth.

DP Singh, chief business officer, SBI MF, says Nifty Next 50 Index gives investors option to go beyond the Nifty 50 stocks without exposing themselves to significantly higher risks.

Also read: Nifty Next 50: A champion index that you must invest in

The Nifty Next 50 Index is a more diversified portfolio than the Nifty 50. Experts say the top holdings of the Nifty 50 may cross the 10 percent-mark when stock markets are polarised (as was seen in 2018 and 2019), with a few individual stocks accounting for most of the gains.

However, the weights of individual stocks in the Nifty Next 50 are unlikely to go beyond 5 percent.

“The Nifty 50 is more concentrated towards a few sectors such as banking and financials. However, the Nifty Next 50 is not as heavily exposed to banking and financials, and also allows investors to participate in more sectors,” says Amol Joshi, founder of Plan Rupee Investment Services.

The fund will come with an expense ratio of 80 basis points (bps) for the regular plans, and 30 bps for the direct plans.

What doesn’t

The index may go through periods of higher volatility compared to the Nifty 50, as bluechip stocks tend to fall less when there is wider market sell-off. Since the year 2010, the maximum annual return given by the Nifty Next 50 index was 48 percent (2012) and the minimum return was a loss of 32 percent (2011). On the contrary, Nifty 50’s maximum return was 31 percent in 2014 and its minimum single year return over this 10-year time horizon was a loss of 25 percent in 2011.

There will be companies in the Nifty Next 50 that are not able to transition to the Nifty 50 and get pushed down to lower market cap indices.

These companies may not be as stable as those in the Nifty 50 and may fall short due to management lapses or disappoint on earnings expectations.

Such companies can hurt the overall performance of the index.

Moneycontrol’s take

The question of whether you should go for an index fund or not mainly boils down to the index and what role it has to play in your portfolio. Although the Nifty Next 50 index can be a bit more volatile than the Nifty 50, the former has been more consistent. Apart from Nifty 50 and Nifty Next 50 indices, Moneycontrol also looked at other indices such as the Nifty Midcap 100, Nifty Small-cap 100 and Nifty 500. In four of these 10 years, the Nifty 50 gave the maximum return among all the indices, but also fell the most four times. The Nifty Next 50 index delivered the maximum return once, but also gave the least returns twice.

Financial planners say those wishing to eliminate fund manager’s risks can hold a combination of Nifty 50 and Nifty Next 50 index funds or ETFs. Between the companies of these indices, you would typically cover the 100 largest companies. For the rest of of your equity portfolio, you can then choose actively-managed multi-cap funds and mid- and small-cap schemes.

Should you choose SBI Nifty Next 50 index fund, then?

Not yet. There are already 14 funds that are linked to the Nifty Next 50 index. Eight of these are index funds and six are ETFs.

Index funds and ETFs are best chosen looking at their tracking error (TE). This measures how close your index fund tracks its index; the lower the TE, the better. Being a new scheme, it’ll take time for the SBI Nifty Next 50 index fund to build a track record.
Jash Kriplani is a journalist with over ten years of experience. Based in Mumbai. Covering mutual funds, personal finance. His last stint was with Business Standard, where he covered mutual funds and other developments in the financial markets
first published: May 6, 2021 09:54 am

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