Your Questions Answered: I want to diversify my portfolio. Can you please elaborate on the Nifty Next 50 Index?

Q. I am a freelance graphic designer, with variable income. I have been investing lump sum in index mutual funds, mainly in Nifty 50 Index funds for the past four years. Many of my acquaintances have suggested I diversify and invest in mutual funds tracking the Nifty Next 50 Index. However, I am not able to comprehend the nuances of the Nifty Next 50 Index. Can you please elaborate on the Nifty Next 50 Index and the pros and cons of investing in mutual funds tracking Nifty Next 50?

Omkar Vashisth, Nagpur, Maharashtra

The Nifty Next 50 Index is a stock market index that represents the 'next' 50 blue-chip companies following the Nifty 50 on the National Stock Exchange of India (NSE). It is a barometer of the Indian capital market, capturing the performance of these companies which rank between 51st and 100th in terms of full market capitalisation. The Nifty Next 50 Index is often referred to as the 'junior Nifty' and is considered by many investors as a benchmark for the large-cap segment beyond the Nifty 50.

Composition and characteristics

The Nifty Next 50 comprises companies that exhibit a blend of large-cap characteristics with growth potential. These companies are the ones poised to enter the Nifty 50 index and are typically the leaders in their respective industries. The key factors considered for inclusion in the Nifty Next 50 Index are as follows:

Free-float market capitalisation method: The Nifty Next 50 Index is computed using the free-float market capitalisation method. This method considers the market capitalisation of a company's shares that are readily available for trading in the market and excludes promoters' holding, government holding, strategic holding, and other locked-in shares that will not come to the market for trading in the normal course. The level of the index reflects the total free-float market value of the constituent stocks relative to a particular base period.

Eligibility criteria for selection: The primary eligibility criterion for a company to be included in the Nifty Next 50 Index is that it should be ranked within the 51 to 100 range based on the free-float market capitalisation in the Nifty 100 index, after excluding the companies already part of the Nifty 50 index. Additionally, the cumulative weight of index constituents that are not available for trading in the Futures & Options (F&O) segment is capped at 10% on quarterly rebalance dates. Moreover, the weightage of individual non-F&O stocks in the index is individually capped at 4.5% on these dates.

Index rebalancing and maintenance: The index is re-balanced on a semi-annual basis, with the cut-off dates being January 31 and July 31 each year. A four-week notice is provided to the market from the date of the change, ensuring transparency and predictability in the re-balancing process. The Index Maintenance Sub-Committee, part of the three-tier governance structure comprising the Board of Directors of NSE Indices Limited and the Index Advisory Committee (Equity), oversees the index governance.

Listing history: The minimum listing history requirement for new listings and companies traded subsequent to a scheme of arrangement for corporate events is one calendar month as on the cut-off date.

Liquidity requirements: Another key aspect of eligibility is liquidity. The companies must demonstrate high liquidity, which is measured by the average impact cost. The impact cost should be 0.50% or less during the six months preceding the cut-off date for 90% of the observations for a basket size of Rs. 10 crores.

Performance and returns

Nifty Next 50 has risen by 63.71% in the past year. In the past 5 years, it has risen by 162.66% (total return). Here are top 5 index mutual funds (direct schemes) tracking Nifty Next 50 basis their 3-year performance.

Source: AMFI website; all data is true as of 1 July 2024.

Note: Past performance is not an indication of future returns.

Investment and trading

Investing in the Nifty Next 50 can be done through various financial instruments such as mutual funds and exchange-traded funds (ETFs) that track the index. The index's liquidity and trading volume make it an attractive option for both retail and institutional investors.

Investing in index mutual funds that track the Nifty Next 50 Index can be an attractive option for investors looking to tap into the potential of India's rapidly growing economy. These funds offer a way to invest in the 50 companies that follow the Nifty 50 in terms of market capitalisation, often referred to as 'junior Nifty'. Before diving into such an investment, it's crucial to weigh the pros and cons.

Pros

Diversification: The Nifty Next 50 covers a diverse range of sectors, providing a broad market exposure that can help in spreading out risk.

Growth potential: Companies in the Nifty Next 50 are potential candidates for inclusion in the Nifty 50, indicating a growth trajectory that can result in higher returns.

Lower costs: Being passively managed, these funds typically have a lower expense ratio compared to actively managed funds, making them a cost-effective option.

Ease of investment: Investors can benefit from the simplicity and convenience of investing in a fund that tracks a well-known index.

Cons

Volatility: The Nifty Next 50 can be more volatile than the Nifty 50, as it includes companies with potentially higher growth but also higher risk.

Concentration risk: Despite being a diversified index, there can be a concentration of certain sectors, which might affect the fund's performance if that particular sector underperforms.

Understanding taxation

Investing in index mutual funds that track the Nifty Next 50 Index has become increasingly popular among investors looking for exposure to a diversified portfolio of large-cap companies in India. These funds aim to replicate the performance of the Nifty Next 50 Index, which includes the next 50 largest stocks after the Nifty 50, based on market capitalisation. As with any investment, understanding the tax implications is crucial for investors to make informed decisions and optimize their post-tax returns.

LTCG: For index mutual funds tracking the Nifty Next 50 Index, long-term capital gains are applicable if the units are held for more than one year. The LTCG tax rate is 10% on gains exceeding ₹1 lakh in a financial year, without the benefit of indexation. This means that if an investor sells their fund units after a year and the realized gains exceed ₹1 lakh, the amount above ₹1 lakh will be taxed at 10%. It's important to note that there is no tax on gains up to ₹1 lakh, providing a tax-exempt threshold for investors.

STCG: If the units of the index mutual fund are sold within one year from the date of investment, the gains are considered short-term and are taxed at 15%. This higher tax rate on short-term gains encourages investors to hold their investments for a longer period, aligning with the long-term investment horizon that mutual funds typically represent.

Dividend taxation

Dividends received from index mutual funds are added to the investor's total income and taxed according to their respective income tax slabs.

Conclusion

The Nifty Next 50 Index is an important index for investors looking beyond the top 50 companies in India. It offers a mix of stability and growth, making it an intriguing option for a diversified investment portfolio. With its dynamic composition and potential for higher returns, the Nifty Next 50 continues to be a focal point for investors aiming to capture the essence of the evolving Indian economy.

The Nifty Next 50 Index funds offer a blend of risk and reward that may suit investors looking for growth opportunities beyond the top 50 blue-chip companies. However, investors must be mindful of the inherent risks and consider their investment horizon and risk appetite before investing. It's always recommended to consult with a financial advisor to ensure that any investment aligns with one's financial goals and strategies.

Disclaimer: Investing in mutual funds involves risks, including potential loss of principal. Please consult with a financial advisor before making any investment decisions.

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