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As an investor, do you wonder which index fund to invest in between Nifty 50 index fund, Nifty Next 50 index fund and Nifty 100 index fund? Here, we tell you what they are all about so you can make informed investing decisions.
Nifty 50, Nifty Next 50 and Nifty 100 Index Funds Decoded
Among the most popular index funds in India are those tracking equity market indices consisting of large market capitalisations or large cap stocks like Nifty 50, Nifty Next 50 and Nifty 100. Let us briefly decode them.
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Nifty 50 Index Fund: It invests in the stocks that constitute Nifty 50 index which are top 50 stocks on NSE by market capitalisation.
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Nifty Next 50 Index Fund: It invests in the Nifty Next 50 index consisting of 50 stocks listed on NSE and ranked from 51 to 100 in terms of market capitalisation. The market capitalisation of many stocks grows over time, and they have the potential to enter the Nifty 50 index in the future. The index may also have stocks that have dropped off from Nifty 50 after its semi-annual reviews.
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Nifty 100 index fund: This fund invests in the Nifty 100 index i.e., top 100 stocks according to market capitalisation. It goes without saying, Nifty 50 and Nifty Next 50 index funds’ stocks are a subset of the Nifty 100 index fund stocks.
How Index Funds Help Investors
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Help conveniently tap market growth
Investors, especially new ones, can obtain exposure to the equity market through index funds without actively selecting stocks.
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Provide easy access to high quality investments
Prominent market indices, especially large cap equity indices like Nifty 50, Nifty Next 50 and Nifty 100 are constituted by high priced stocks of prominent companies with established businesses and consistent earnings track record. Index funds help investors benefit from the growth potential in these stocks with investments as low as Rs 500.
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Manage volatility with ample diversification
Investments in index funds tracking broad-based equity indices like Nifty 50 automatically create a diversified portfolio that helps contain concentrated stock volatility.
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Provides low expense advantage
Index fund investments have lower costs compared to actively managed funds due to lower fund management and research expenses.
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Offer low maintenance investments
Index funds are appropriate for investors who do not want to actively track their investments and are happy to receive growth from the equity asset class.
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Provides auto-rebalancing of portfolio
Composition of major indices typically get reviewed twice a year with underperforming securities getting replaced/retained. This may help in automatic rebalancing of the fund portfolio.
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Automates long term investments
Regular investments through Systematic Investment Plans (SIP) in index funds can automate regular investments for long term goals. It also removes emotions from investment decisions arising from major market developments.
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Preponderance of choice
With passive and index investing becoming popular across the globe, especially after the 2008 financial crisis, mutual funds offer an ever increasing choice to new as well as experienced investors.
Limitations of Index Funds
Limits to upside
Returns of index funds are subject to expenses and tracking errors i.e., the deviation of actual returns from the index returns due to fund management decisions, such as keeping some money in debt and cash to meet investor redemptions. Compared to actively managed funds, where fund managers try to beat the scheme benchmarks, in index funds, the aim is to deliver returns as near as possible to that of the index.
Restricted investment choice
Index funds must stick to securities in the index. Unlike actively managed funds, they do not actively choose investments based on market opportunities.
Nifty 50 vs Nifty Next 50 vs Nifty 100
Now that we have a basic idea of index funds such as those based on Nifty 50, Nifty Next 50 and Nifty 100, how do you choose the right index fund? Here are some key aspects to consider.
Index composition: More broad-based the index, especially with equities across sectors, better would be the diversification, and relatively lower the volatility and risk.
Risk: More the securities in the index, besides established businesses and revenue streams, relatively lower the volatility and risk. For instance, in a Nifty 50 vs Nifty Next 50 comparison the latter would have relatively higher volatility but is less likely to be affected by a single or few stocks in the index.
Role in achieving financial goals: Investors with long-term investment horizons may consider evaluating such index funds as part of their overall asset allocation strategy.
Using Nifty 50, Nifty Next 50 and Nifty 100 Index Funds
Investing in Nifty 50, Nifty Next 50 and Nifty 100 index funds or other index funds can be guided by two approaches.
Active-passive fund mix
Investors need to determine whether they want to invest only in passive funds like index funds or actively managed funds. They could also opt for a mix of the two, starting with index funds like a Nifty 50 or Nifty 100 and later adding actively managed funds.
Follow “Core and Explore” strategy
Also known as the “Core and Satellite” strategy, it involves allocating a major portion of long-term investments to relatively stable, diversified investments, while using a smaller allocation for strategies that can provide additional diversification. In an all-passive portfolio, the core may comprise a broad-based index fund such as a Nifty 50 Index Fund or Nifty 100 Index Fund, while the satellite portion may include funds tracking other market segments or themes, depending on the investor's objectives and risk appetite. In a portfolio combining active and passive funds, the satellite allocation may comprise actively managed mid-cap, small-cap, flexi-cap or thematic funds, depending on the investor's investment goals and risk profile.
To conclude, index funds offer a simple, convenient, and low cost way of making higher risk, high growth investments in equities. In this endeavour, Nifty 50, Nifty Next 50 and Nifty 100 index funds can play a pivotal role.
Disclaimer: Please note that the reference to any industry/sector/stock is provided for illustrative purposes only. This should not be construed as a research report or a recommendation to buy or sell any security or sector. Past performance may or may not be sustained in future. Investors are advised to consult a financial advisor before making investment decisions.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
