Summary of this article
Nifty 50 offers stability with lower volatility
Nifty Next 50 delivers higher growth, higher risk
Nifty 100 provides balanced diversification
By Chintan Haria, Head, Product Development and Strategy, ICICI Prudential AMC
After a couple of volatile years in the markets marked by a spate of negative factors such as foreign portfolio investor (FPI) outflows, trade tariffs, rupee fluctuations, wars and supply chain disruptions, there may be some reason to cheer for. Valuations are more reasonable, especially in the large-cap space and there are expectations of peace talks in West Asia.
For investors looking to make the most of large-caps, there are three choices. The Nifty 100, Nifty 50 and Nifty Next 50 have all seen valuations correct, and present good opportunities. For most investors, the call is between investing in Nifty 100 alone or in Nifty 50 plus Nifty Next 50 together.
Understanding the indices, and getting a detailed idea of their risk-return profiles, you should make an allocation decision based on your own risk appetite.
How Compositions Change
The Nifty 50 gives the largest of companies in India by market capitalisation. It is the most tracked benchmark, as a proxy for Indian equities. The index gives a compact 50-stock portfolio. Financial Services (35.45 per cent), Oil, Gas and Consumable Fuels (10.95 per cent), Information Technology (9.40 per cent), Automobile and Auto Components (6.60 per cent) and FMCG (5.96 per cent) are the top five sectors of the index.
Now, the Nifty Next 50 represents the 50 companies beyond the Nifty 50 with the highest market capitalisation. It represents the growth element in the large-cap universe. The index composition varies significantly from the Nifty 50. Financial services (21.19 per cent), Capital Goods (16.37 per cent), FMCG (8.98 per cent), Power (8.66 per cent) and Automobile and Auto Components (8.22 per cent) are the top five sectors.
However, when the Nifty 100 is taken, the weightages are such that the index almost resembles the Nifty 50. Financial Services (32.99 per cent), Oil, Gas and Consumable Fuels (10.23 per cent), Information Technology (8.08 per cent), Automobile and Auto Components (6.88 per cent) and FMCG (6.48 per cent) are the top five sectors of the index.
However, as a 100-stock portfolio, it can be a stable holding with lower concentrations compared to the Nifty 50.
Performances, Risks And Choices
The first mode of gauging performance is measuring point-to-point trailing returns
However, to get a better picture, it is important to take rolling data, risk (standard deviation) and long-term average (mean, median) returns. The minimum and maximum returns over a period are also understood through these rolling returns.
Typically, 5-year and 10-year rolling returns over long periods of decades give a picture of how the indices have fared and their consistency.
From a valuation perspective, the price earnings multiples, price to book ratio and dividend yield are measured.
Now, making the right index choices is not easy for retail investors. The common choice is between investing in Nifty 100 or in a combination of Nifty 50 and Nifty Next 50.
The Nifty 100 encompasses both the Nifty 50 (accounting for around 85 per cent of the market capitalisation) and Nifty Next 50 (making up the remaining 15 per cent).
Thus, as a single index, the Nifty 100 offers inherent diversification with representation from two indices. It offers a balanced portfolio that is a blend of the top bluechips and the next 50 emerging giants.
As seen from the performance data earlier, the index offers smoother returns with lower volatility.
However, mixing the Nifty 50 and Nifty Next 50 changes the dynamics. While the Nifty 50 delivers returns with moderate risk, the Nifty Next 50 has given better returns with higher volatility as seen from the rolling return data. A blend of stability and growth as well as established and upcoming leaders is achieved by investing in these two benchmarks.
An investor cannot simply decide on a 50:50 allocation to these two indices as his risk-return profiles would be very different from the Nifty 100. The decision would depend on individual portfolio needs, risk appetite and time horizon.
Investing in a combination of Nifty 50 and Nifty Next 50 will mean following a defined allocation pattern between the two indices and rebalancing periodically. A volatile Nifty Next 50 may offer opportunities to buy on dips. There is no clear winner among the two choices for investors.
The author is Head, Product Development and Strategy, ICICI Prudential AMC
(DISCLAIMER: 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.)
