In this article, we will be covering three essential topics,
What is the nifty 50 index and the Nifty following 50 indexes, and what is their difference?
Which index is better from an investment perspective, whether you should invest in the nifty 50 indexes or go with the Nifty next 50 indexes?
Why is there so much difference between the returns of the Nifty 50 vs Nifty Next 50 index fund?
We will cover all these three topics in detail in a straightforward and step-by-step way on Nifty 50 vs Nifty Next 50 index fund, so without further Ado, let’s begin the topic.
What are the nifty 50 and Nifty next 50 indexes, and what is their difference?
In the stock market stock ranking based on free-float market capitalisation, the first 50 fall under the nifty 50 index, and the rest 50 fall under the Nifty following index.
Now, what is Free-Float market capitalisation?
First, let us understand straightforwardly that when we multiply the total number of outstanding shares with the price of each share, that gives the market capitalisation value.
Market Capitalization = Total Outstanding Shares x Price of each share.
But when we multiply publicly owned outstanding shares with the price of each share, it gives the value of Free-Float market capitalisation.
Free-Float Market Capitalization = Publicly owned Outstanding Shares x Price of each share.
Now let us understand what this term is publicly owned outstanding shares.
When we subtract the amount of a total number of outstanding share which is not available for trading for the public and is held by other government or the promoters or financial institution, when we subtract this amount from the total number of outstanding share, then we get the value of publicly owned outstanding shares.
Publicly owned Outstanding Shares = Total Outstanding Shares – Number of Shares not available for Trading by public.
And to simplify it further, the shares available for trading in the stock market for the general public like you and me are known as publicly owned outstanding shares.
And it has been observed that the shares with a greater Free Float Factor tend to be less volatile than the company with a lesser free float factor.
And that is why most indexes use this free float Market capitalisation technique worldwide to construct these indexes.
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Risk analysis Nifty 50 vs Nifty Next 50 index fund
Let’s understand the volatility factor of the Nifty 50 vs Nifty Next 50 index fund. For that, we will look at both indices’ standard deviations.
The standard division is a parameter used to measure volatility, and the lesser the value, is better.
So first look at the first year standard deviation of the nifty 50 index, which is 16.98 per cent, and for Nifty next 50, it is 19.68 per cent. So in the first year, regarding the standard deviation, nifty 50 performs better than Nifty in the next 50.
Now let us look at the five-year standard deviation of the nifty 50 index, which is 19.44; for the Nifty following 50 indexes, it is 19.52 per cent. So again, the nifty 50 is performing better in terms of standard deviation than the Nifty next 50 index.
And with this, it is evident that with a higher free-float market capitalisation, the Nifty 50 is less volatile than the next 50.
Return analysis Nifty 50 vs Nifty Next 50 index fund
With this, we will move to our next topic and discuss the return analysis of both indices.
And here, we will find out which index is better in terms of investment perspective, and for that, we will be comparing the past 10-year calendar year returns of both indexes.
And we can see that in 5 out of 10 years, nifty 50 has outperformed Nifty next 50, and similarly, in 5 out of 10 years, Nifty next 50 has outperformed nifty 50.
And next, we will compare the compounded returns of both these indices. Here we can see that in a one-year, three years and five-year period, nifty 50 has outperformed Nifty next 50, and in nine year period Nifty next 50 has exceeded nifty 50 in terms of compounded returns.
So coming back to the question of which index is performing better in terms of returns, the answer is that both indexes are doing equally well. Sometimes Nifty 50 performs better, and sometimes Nifty next 50 serves better.
Sector allocation of Nifty 50 vs Nifty Next 50 index fund
And we will understand this thing much better if we look at both indices’ sector allocation.
And if we look at the sector allocation of the Nifty 50 vs Nifty Next 50 index fund, we can observe that the sector allocation in both these indices is so different. This is because so few sectors you find in the Nifty following 50 indexes you won’t find in the nifty 50 indexes and vice versa.
And that is why it is unnecessary that if the sector inside the nifty 50 indexes is doing well, the Nifty following 50 sectors will do equally well and vice versa.
And if we look at the sector allocation of both indices, nifty 50 and Nifty next 50, we can observe the following trend in all these years.
In sector allocation, and if we observe the stock allocation pattern of the nifty 50 indexes, we can see that HDFC group has been allocated 15.85 per cent, Reliance group 10.4 per cent and Tata group 8.52 per cent, so if anything goes wrong with these three groups it will have a significant impact on the performance of nifty 50 indexes.
But in the case of the nifty next 50 stock allocation, the primary allocation is in the Adani group of almost 10.30 per cent, so if anything goes wrong with the Adani group, it will significantly impact the nifty following 50 returns.
And that is why we have witnessed a sharp fall or decline recently in returns of nifty next 50 after this Hindenburg report on the Adani group—similar volatility May persist until this issue is resolved.
So what can an investor do in the current situation?
I recommend that you continue your SIP in both indices, which are nifty 50 and Nifty next 50, but for any new lump sum in the Nifty following 50 indexes, you must wait for at least some time till this Adani and Hindenburg issue gets resolved.
And it is highly recommended that you invest in a direct Index Fund plan of both these indices because they have very nominal expense ratios.
This article will help you make the right investment decision regarding the right index and index fund.
So if you like, this article does mention in the comments.
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory. This is not an investment advisory. The blog is for information purposes only. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
Past performance is not indicative of future returns. Please consider your specific investment requirements, risk tolerance, goal, time frame, risk and reward balance, and the cost associated with the investment before choosing a fund or designing a portfolio that suits your needs. The performance and returns of any investment portfolio can neither be predicted nor guaranteed.
The information provided in this article is solely the author/advertisers’ opinion and not investment advice – it is provided for educational purposes only. Using this, you agree that the information does not constitute any investment or financial instructions by Ace Equity Research and the team. Anyone wishing to invest should seek their own independent financial or professional advice. Do conduct your research along with financial advisors before making any investment decisions. Ace Equity Research and the team are not accountable for the investment views provided in the article.
S.K. Singh (B.Sc., DHRM, PGDB (Manipal), Ex-Banker (10 years Exp.)), AMFI Reg. No.-251149.
At the helm of Ace Equity Research is our esteemed founder, S.K. Singh. With a solid educational background and years of experience in the field, S.K. Singh brings valuable expertise to our platform.
S.K. Singh's passion for financial markets and dedication to helping investors make informed decisions led him to establish Ace Equity Research. With a deep understanding of the intricacies of the investment landscape, he has a Commitment to Excellence and a Data-Driven Approach to Equity Research.