Introduction to Nifty Next 50
NIFTY Next 50 is an index that represents the performance of ‘next’ 50 stocks which come after the top 50 in order of free float market capitalization, subject to index criteria. NIFTY Next 50 thus represents companies which are presently below the NIFTY 50 index constituents and may be potential candidates for inclusion in NIFTY 50 in future, subject to index criteria.
- Base Date : 3rd Nov 1996
- Base Value : 1,000
- Current Value : 28,000+ (as on 13th march 2019)
- Represents 10% Of Free Float Market Cap of Stocks Listed on NSE. This is a very nice achievement. And if we see as per traded value, then almost 13% of the volume stocks traded on NSE is from Nifty Next 50. This is nice contribution and is increasing YoY which is very good for this index.
The Nifty Next 50 index started on 3rd November with a base rate of 1,000. The index has grown by almost 28 times in close to 22-23 years. This is a very phenomenal rise. Nifty Next 50 is large-cap oriented index.
what is nifty next 50?
SEBI has done the new categorization of stocks into large cap, mid-cap and small cap. The top 100 stocks as per the market capitalisation are the large cap stocks. These 100 large cap funds can be divided into Nifty 50 and Nifty Next 50. This means that the first 50 stocks are included in Nifty 50 and the next 50 stocks, from 51 to 100, are included in Nifty Next 50. And Nifty 100 Index is a combination of Nifty 50 and Nifty Next 50.
So, movements keep happening between Nifty 50 and Nifty Next 50. The stock which perform very well are promoted to Nifty 50 and the stocks which don’t perform very well are demoted to Nifty Next 50.
Disadvantage of Nifty Next 50
A disadvantage that nifty Next 50 has is that the stocks that are not performing well in Nifty are pushed down to Nifty Next 50. This is a negative factor that this index has.
Advantage of Nifty Next 50
- If there is a mid-cap stock which is performing well and is not present there in the Nifty 100, gets promoted to large cap and gets added in Nifty Next 50. This an advantage that the Nifty Next 50 index has.
- Nifty Next 50 doesn’t have a concentrated allocation to any particular stock. So, this is very big advantage to Nifty Next 0 compared to Nifty 50. Nifty 50 has very concentrated allocation, like HDFC Ltd has round 9% allocation, which is not the case in Nifty Next 50.
sector allocation of nifty next 50
- As one can see, Nifty Next 50 is diversified kind of index.
- Consumer Goods also include FMCG companies
- If compare the allocation of Financial services with that of Nifty 50, then Nifty 50 has a huge allocation to financial services as Nifty 50 has HDFC bank, ICICI bank, SBI bank, HDFC Ltd.
- Top 5 Sectors, which are consumer goods, financial services, pharma, automobiles and cement & cement products, have 76% allocation.
top 10 stocks
- These top 10 stocks and their allocations are as above:
- Top 10 Stocks of Nifty Next 50 index make up 35.4% of the total allocation.
- The rest 40 stocks gave 65.6% allocation. This means that there is no over allocation in any stock.
- Nifty Next 50 index has pure diversification in allocation to all the stocks.
largest and smallest stock
- This analysis is as per free float market cap. Free float means the stock held by general public or FII’s or DII’s or any one else other than the promoter and promoter group.
- The market cap of these free float stocks is called the free float market capitalization. The stake that the promoter holds in not available freely in the market and is therefore not included. And as per this free float market cap allocation of any stock is done.
- The largest stock is Britannia Industries, the smallest is The New India Assurance Company and the medium stock is HDFC Standard Life Insurance Company.
Performance Comparison: Nifty 50 v/s Nifty Next 50
- From November 1006, today Nifty 50 has a level of around 11,000 and Nifty Next 50 has a level of around 28,000.
- One can clearly see how tremendously Nifty Next 50 has outperformed Nifty 50.
- In the last 18 years, 41 stocks in the Nifty 50 have been promoted from Nifty Next 50 to Nifty 50. Hence, this is a very big achievement of Nifty Next 50.
- If we follow the same traditional pattern, 60%-70% of the stocks in Nifty Next 50 today can be upgraded to Nifty 50 in the future.
Risk-Return Trade Off
- This is quite an interesting analysis.
- Instead of looking at Since Inception returns it is better to compare on other trailing return parameters as it gives a little consistency.
- Nifty Next 50 has clearly outperformed Nifty in all the parameters except is 1 year returns as the last year was not very good for Nifty Next 50.
- The volatility, that is how much the indices have moved up and down, is almost same and there is not much huge difference between the volatility of the two indices.
- When we divide the annualized returns with annualized volatility, what we get is the Return-to-Risk Ratio. And the index which has better return-risk ratio is a better index (or fund in case of mutual funds).
- Return-risk ratio indicates how much risk has been taken and how much return has been earned correspondingly.
- In the parameters of 10 years, 7 years and 5 years Nifty Next 50 seems like a better investment option but in the 3 years and 1 years parameters Nifty 50 looks to be the better choice for investment.
Calendar Year Performance
- 2000 and 2001 are the only 2 years where Nifty Next 50 has performed negatively continuously.
- But every time Nifty Next 50 has performed negatively the nest year it has given positive and better returns.
- In 2018, Nifty Next 50 has performed negatively.
- NIFTY Next 50 represents companies which are presently constituents of NIFTY 100 and may be potential candidates for inclusion in NIFTY 50.
- NIFTY Next 50 index has historically outperformed NIFTY 50 index since its inception with a higher return to risk ratio for various longer periods. The year-wise relative performance on the other hand is more or less balanced.
- NIFTY Next 50 has witnessed a very well diversified portfolio at both stock and sector level.
- These fundamental attributes of the index coupled with good historical performance both on a return and risk basis makes NIFTY Next 50 an appealing index strategy.
- The data has been taken from the website of NSE and not much changes have taken place in the data from as on December 31, 2018.
- The numbers that are used are approximate and have been rounded for presentation purposes.
- We are not in any way saying that these are bad companies, or the stock of these companies are bad.
- We are also not suggesting anyone to immediately go and buy these stocks or invest in the stock markets.
- Only an analysis has been presented here. No judgments or final statements are being made here.