Nifty Next 50: A Diversified Gateway To India's Emerging Large-Cap Leaders

By Chintan Haria,

With the midcap and small-cap market segments having significantly outperformed their larger peers in the last few years, this space has attracted a lot of investor interest and thereby, flows. These segments are overvalued and could see a moderation in returns going forward. Price-to-earnings multiples of the Nifty Midcap 150 and Nifty Small Cap 250 indices are currently above their 5-year averages. Investors should thus prefer the relatively reasonably valued large-cap stocks. Large-caps are defined as the top 100 stocks based on market capitalization. But within the large-cap space, the 50 largest stocks as represented by the popular Nifty 50 index tend to attract the bulk of the flows, with less attention given to the remaining 50 large-cap stocks.

Nifty Next 50 index

The Nifty Next 50 index comprises the 50 companies ranked 51st to 100th by market capitalization. This index represents large companies that have the potential to be included in the most widely tracked Indian equity index - Nifty 50. Some examples of companies that graduated from the Nifty Next 50 index to the Nifty 50 index over the years are IndusInd Bank, Bajaj Auto, Coal India, Kotak Mahindra Bank, Titan, Sun Pharmaceuticals, Grasim Industries, Shree Cement and Bajaj Finance. By buying into these companies at the Nifty Next 50 stage, investors lucratively bought into the potential growth and price upside that transpired as they grew and got listed in the Nifty 50 index.

The Nifty Next 50 index offers diversification and sectoral balance. As of December 2024, the top 5 stocks in the Nifty Next 50 make up only 22.34% of the index, while the top 10 stocks account for just 36.77%, ensuring even distribution across a wide range of companies. This structure allows investors to gain exposure to emerging leaders in sectors like Financial Services, Consumer Services, and Power, with the index also providing unique exposure to Realty and Chemicals—sectors not represented in other indices.

The sector diversification of the Nifty Next 50 is also attractive, with significant allocations to Financial Services, Consumer Services, and Power, which together make up 46.89% of the index. This balanced sector exposure enables investors to tap into high-growth areas while avoiding excessive concentration in a few sectors.

Nifty Next 50 Exchange Traded Fund

To take exposure to the Nifty Next 50 index, one can opt for a Nifty Next 50 exchange-traded fund. These funds are passively managed and invest in the constituents of the Nifty Next 50 index with the objective of replicating its returns. Being passively managed, there is no cost of research or fund management, making the Nifty Next 50 ETF a low-cost investment avenue. Each unit of the ETF represents the basket of 50 securities offering investors diversification with limited capital.

A Nifty Next 50 ETF is suitable for investors looking for index-linked returns to create wealth over a horizon of 3+ years. Units of the ETF can be bought and sold like shares using a Demat account. The units trade on exchanges at real-time prices during market hours. A Nifty Next 50 ETF with large assets under management, a low expense ratio and low tracking error can enable easy liquidity and optimize returns.

The Nifty Next 50 index represents the often-overlooked set of smaller large-cap stocks. Thus, a Nifty Next 50 ETF can be a way to gain enhanced exposure to the large-cap space by owning potential industry leaders and new-age businesses. The Nifty Next 50 index also offers sectoral and stock-level diversification, potentially enhancing risk-adjusted returns. The Nifty Next 50 ETF can complement investor’s Nifty 50 investments, together enabling investors to own the 100 largest Indian businesses and participate in the Indian economic momentum.

In conclusion, the Nifty Next 50 index presents a compelling opportunity for investors seeking diversified exposure to emerging large-cap leaders in India. Given its balanced sectoral allocation and potential for growth, it can be a strategic addition to any portfolio. As valuations in the broader market remain high, investors should consider gradually accumulating units of Nifty Next 50 ETFs over time, taking advantage of market fluctuations and the index's potential for long-term growth. This approach allows investors to tap into the next wave of industry leaders while optimizing risk-adjusted returns.

(The author is Principal - Investment Strategy, ICICI Prudential AMC. Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)