NIFTY Next 50 Stocks are the Next Big Thing. Or Are They? (Jan 2020)

NIFTY Next 50 represents companies listed on the NSE which are 50 of India’s biggest companies beyond companies that are part of NIFTY 50. NIFTY Next 50 companies represent 12-13% of NSE’s total market capitalization and have gained much in popularity over the last 3 years. We look closely at this rising Index in this post.

What is the NIFTY Next 50 Index?

Unlike common parlance, the NIFTY Next 50 does not comprise companies which are ranked between 51 to 100 as per market capitalization of all companies listed in the National Stock Exchange. Clearly defined – the stocks comprising of the NIFTY Next 50 Index represents 50 companies from NIFTY 100 after excluding the NIFTY 50 companies.

Let’s examine this a little in detail to have a clear idea of what comprises the NIFTY Next 50 Index.

NIFTY 100 comprises of the top 100 companies based on full market capitalisation from the NIFTY 500 universe. On the other hand, the NIFTY 50 Index represents 50 companies selected from the NIFTY 100 Index based on free-float market capitalization. The balance between NIFTY 100 and NIFTY 50 is what comprises of NIFTY Next 50 Index

The key distinction between NIFTY 100 and NIFTY 50 is the use of full market capitalization versus free-float market capitalization. For a more detailed account on this, refer to my detailed article titled What Is Free Float Market Capitalization?

List of Companies in NIFTY Next 50 Index

The table below gives the list of fifty companies that comprise the NIFTY Next 50 Index with the market capitalization of each company

These 50 companies total 22,25,7494 crores of market capitalization (as of 19-Jan-2020) which is about 13% of the total market capitalization of the companies listed in the National Stock Exchange. HDFC Life Insurance Co. Ltd. and Avenue Supermarts Limited are the companies with the highest market capitalization that are part of the NIFTY Next 50 Index.

Sectoral Distribution of NIFTY Next 50 Companies

One of the advantages of investing in the NIFTY Next 50 Index is access to a diversified set of companies which is very different from NIFTY 50 Companies. To put that into perspective –

• The NIFTY 50 companies donot consist of a single insurance company while NIFTY Next 50 has six insurance companies (SBI Life Insurance, New India Assurance, ICICI Prudential Life Insurance, ICICI Lombard General Insurance, HDFC Life Insurance and General Insurance Corporation) that contribute almost 18% of the NIFTY Next 50 Index
• On the other hand, Energy has a large portion of NIFTY 50 (thanks to Reliance Industries) with almost 15% weight. However NIFTY Next 50 has a very small proportion of weight (less than 5%) to energy companies
• We see a similar diversion with technology companies with the NIFTY 50 having a 13% weight with the two behemoths in Infosys and Tata Consultancy Services (TCS). However NIFTY Next 50 has only 1% weight in its index from technology

Overall a combination of NIFTY 50 and NIFTY Next 50 gives you a wonderful spread of Indian companies.

Performance of NIFTY Next 50 companies

We mapped the performance of all fifty companies in the NIFTY Next 50 Index in terms of –

• One year stock performance
• % Away from 52 week low
• Return on Equity (ROE)
• Return on Capital Employed (ROCE)
• Price Earning Ratio (PE Ratio)
• Enterprise Value / EBITDA

These six variables can certainly help us understand the kind of companies that generally make it to the Next 50 index and will also assist you in identifying stocks that can be bought as an investment. 

Comparison between NIFTY 50 and NIFTY Next 50

We extend our comparison of the NIFTY 50 and the NIFTY Next 50 index by looking at six essential variables such as the market capitalization, return on equity, price earning ratio etc. to see how both these indices have been performing on different parameters.

For more information on NIFTY indices, do read my previous article on the subject titled A Complete Investor Guide to Nifty50, Bank Nifty & 65 Other Indices

The table above clearly shows that the NIFTY Next 50 is clearly more expensive to purchase in the current market environment with a high PE ratio and a high EV/EBITDA ratio. This can also be a function of the kind of companies in this index which has more consumer goods and insurance constituents as compared to the NIFTY 50 which has a lot of banks, technology and energy companies.

Performance of NIFTY Next 50 Index

Many investors are buying into Nifty Next 50 Index mutual funds. As of December 2019, the AUM of Next 50 Index funds was over ₹2,300 crores with schemes from ICICI Prudential Mutual Fund, SBI Mutual Fund and UTI Mutual Fund having the lion’s share of the pie.

Let’s look at how these funds have performed (data as of January 20, 2020)

The NIFTY Next 50 Index funds and ETFs have delivered a little over 10% annual returns over the last 10 years which is a lot similar to how the NIFTY 50 Index has performed over the same time period. 

A few readers of the blog have asked me on whether it makes sense to invest via ETFs rather than purchasing mutual fund units. In truth, index mutual funds and ETFs (exchange traded funds) have a lot (and a lot more) in common. They constitute the same stocks that are part of the index that they represent which means one can expect similar performance from the instrument. The key difference is that ETFs can be traded like stocks i.e. buy and sell when you please whenever the markets are open. On the other hand, mutual fund purchases are only at the end of day at the declared NAV (net asset value). In my opinion, equity investors who are into investing for the long term should not bother with this difference and continue to purchase on whichever mode they are comfortable with.

How to Invest in NIFTY Next 50 companies?

You can invest in the NIFTY Next 50 Index using the ETF (Exchange Traded Funds) route or the Mutual Fund route.

If you invest using the mutual fund route, then investing in a NIFTY Next 50 Index is as simple as – 

a) Download an investment app like ETMONEY, Groww or PayTM Money

b) Complete your KYC (this is done via video and is 100% paperless)

c) Pick the index of your choice and make the payment towards the money you want to invest

The following mutual fund index schemes are available for buying into NIFTY Next 50 Index –

• DSP Nifty Next 50 Index Fund – Direct – Growth
• ICICI Prudential Nifty Next 50 Index Fund – Direct Plan – Growth
• Motilal Oswal Nifty Next 50 Index Fund (MOFNEXT50) – Direct Plan – Growth
• UTI Nifty Next 50 Index Fund – Direct Plan – Growth

I have listed only the direct plans above as it is always advisable for you to purchase the direct plan as it comes with broker commissions which can be as high as 0.75%. Since you are buying an index fund (and not an active fund), the question of advisor’s value add in the fund selection process does not come in unless the advisor is also helping you with additional support in the form of portfolio management, rebalancing, asset allocation, tax harvesting etc.

Of the above mutual funds, the ICICI Prudential Nifty Next 50 Index Fund – Direct Plan and the UTI Nifty Next 50 Index Fund – Direct Plan hold the highest AUM of over ₹500 crores each.

You can also invest via the ETF route which is a little more complicated because you need a demat account from a broker like Zerodha, ICICI Direct, HDFC Securities etc. to invest through. If you already have a demat account or have procured one then buying the NIFTY Next 50 ETF is as simple as purchasing a stock from your online trading account.

The following Next 50 Index schemes are available for buying via the ETF mode –

• Aditya Birla Sun Life Nifty Next 50 ETF
• ICICI Prudential Nifty Next 50 ETF
• Nippon India ETF Sensex Next 50
• Reliance ETF Sensex Next 50
• SBI – ETF Nifty Next 50
• SBI – ETF SENSEX NEXT 50
• UTI Nifty Next 50 Exchange Traded Fund
• UTI S&P BSE Sensex Next 50 ETF

Among ETFs, SBI – ETF Nifty NEXT 50 and UTI Nifty Next 50 Exchange Traded Fund are the more popular ones and have been in existence for a few years now

It is also interesting to note that in the ETF space, there are a few SENSEX Next 50 possibilities for investors. As the name suggests, this index constitutes 50 of the largest and most liquid companies within the S&P BSE LargeMidCap Index which are outside the BSE Sensex. While this is not the exact definition but a common way of describing this is companies which are ranked between 31 to 80 in the Bombay Stock Exchange

Conclusion

Here is what we learnt about the NIFTY Next 50 Index and funds –

1. The NIFTY Next 50 constitutes 12-13% of all market capitalization of the primary Indian stock exchanges amounting to over ₹22,00,000 crores
2. The constituents of the NIFTY Next 50 are a lot different from NIFTY 50 which can provide investors with much needed diversification. Additionally investors can smartly use the NIFTY 50, NIFTY Next 50, NIFTY Midcap 150 and other indices to create a permanent low-cost high-return low-risk portfolio that can continue over the long term. On how to create such a portfolio, do read one of my more popular articles titled How I Built a High Return-Low Risk Portfolio with Index Funds
3. In the current environment, NIFTY Next 50 stocks are on the expensive side. However it is important to note that these stocks generally are at a premium as these are geared to be the next batch of NIFTY 50 stocks in the future with the potential of them being true industry leaders and generate high ROE & free cash flows 
4. The performance of the NIFTY Next 50 Index has been on par with that of NIFTY 50 Index over the last 10 years
5. Investors can purchase the NIFTY Next 50 Index using the exchange traded funds (ETF) or the Index Mutual Fund route