LOVE OR HATE - Nifty 50 OR Nifty next 50 which one is better?

Summary

In this video, the speaker compares investing in the Nifty 50 versus the Nifty Next 50 index, highlighting several key points. They argue that Nifty 50 has lower expense ratios, lower risk, and better risk-adjusted returns, especially during market downturns. The Nifty Next 50, while offering higher growth potential, comes with higher costs, greater volatility, and often underperforms in bear markets. The speaker also emphasizes that Nifty Next 50 includes stocks that have been downgraded from Nifty 50, sometimes leading to poor-quality investments. Overall, they suggest that Nifty 50 is the safer, more stable investment choice.

Takeaways

• 😀 Higher expense ratios: Nifty Next 50 index funds generally have higher expense ratios compared to Nifty 50, which means investors pay more money for managing the fund.
• 😀 Impact cost: The high impact cost in Nifty Next 50 arises from frequent rebalancing, where new companies join and existing ones leave, resulting in a higher cost to acquire shares.
• 😀 Higher risk, lower returns: Investing in Nifty Next 50 involves higher risk, as it includes mid-cap and small-cap stocks, but often provides lower returns compared to Nifty 50.
• 😀 Risk comparison: Nifty Next 50 has a higher risk score (1.34) compared to Nifty 50 (1.17), suggesting that investors are taking on more risk with little additional reward.
• 😀 Lower returns in Nifty Next 50: Despite claims that Nifty Next 50 offers better returns over the long term, in reality, funds tracking this index often deliver lower returns compared to Nifty 50.
• 😀 Poor performance in bear markets: Nifty Next 50 tends to underperform Nifty 50 during market downturns, with larger drops observed in years like 2008, 2011, and 2022.
• 😀 Exclusion of stocks: When stocks are excluded from Nifty 50 and move to Nifty Next 50, they might be lower-performing stocks, potentially affecting the overall performance of Nifty Next 50.
• 😀 Performance comparison: Comparing fund returns rather than index returns shows that Nifty 50 funds generally perform better than Nifty Next 50 funds over time.
• 😀 Preference for stable stocks: Nifty 50 tends to include large-cap, stable companies, which investors may prefer over the riskier mid and small-cap stocks found in Nifty Next 50.
• 😀 International investment preference: Nifty 50 enjoys higher global recognition and investment, with more international funds involved, making it a more trusted option for investors.

Q & A

Why is the expense ratio higher for Nifty Next 50 index funds compared to Nifty 50 index funds?

The expense ratio for Nifty Next 50 index funds is higher because of the higher impact cost involved in rebalancing the index. Every six months, when new companies join or leave the index, funds must adjust their portfolios, which often leads to buying large quantities of stocks. This creates a higher cost due to the limited availability of shares, especially when large buy orders are placed, driving up the price of the stock.

What is high impact cost, and how does it affect Nifty Next 50 index funds?

High impact cost refers to the increased price paid by index funds when they buy stocks that are part of a newly rebalanced index, especially when there is a significant gap between demand and supply. When an index fund buys a large quantity of shares of a stock like Zomato, for example, the cost to acquire these shares rises, increasing the overall expense ratio of the fund.

How does the risk of investing in Nifty Next 50 compare to Nifty 50?

Nifty Next 50 carries higher risk than Nifty 50. This is because the Nifty 50 includes large-cap stocks, which tend to be less volatile, whereas Nifty Next 50 includes mid-cap stocks, which are generally riskier. As a result, Nifty Next 50 has a higher risk score compared to Nifty 50, making it a riskier investment overall.

What evidence suggests that Nifty Next 50 offers lower returns for the higher risk it carries?

The returns data shows that while Nifty Next 50 may appear to outperform Nifty 50 in some long-term comparisons, the funds tracking Nifty Next 50 do not consistently offer better returns. For example, over a five-year period, ICICI Nifty 50 returned 12%, while ICICI Nifty Next 50 returned only 8%, indicating that the higher risk is not compensated with proportional returns.

Why do bear markets affect Nifty Next 50 more severely than Nifty 50?

In bear markets, Nifty Next 50 tends to drop more significantly than Nifty 50 because it is made up of smaller, less stable companies. Smaller companies are generally more volatile and can suffer larger losses in downturns compared to the more stable, large-cap companies in Nifty 50.

Can you explain the impact of stock exclusions from Nifty 50 on Nifty Next 50?

When a stock is excluded from Nifty 50, it often ends up in Nifty Next 50. These stocks may be underperforming or losing market value, which can make Nifty Next 50 less attractive to investors. For example, companies like IOC, which are removed from Nifty 50 due to a decline in market cap, may negatively affect the quality of stocks in Nifty Next 50.

Why is investing in Nifty 50 considered more stable compared to Nifty Next 50?

Nifty 50 is more stable because it consists of large-cap companies, which tend to be more resilient to market fluctuations. In contrast, Nifty Next 50 is composed of mid-cap companies, which are more volatile and prone to larger swings in market value, making them riskier investments.

How do international index funds prefer Nifty 50 over Nifty Next 50?

International index funds generally prefer Nifty 50 because of its larger, more stable companies. Nifty Next 50 lacks the same level of global investment due to the higher risk associated with mid-cap stocks and the limited international recognition of these companies compared to the top 50 companies in Nifty 50.

How do the returns of Nifty 50 compare to Nifty Next 50 during market downturns?

During market downturns, Nifty 50 tends to perform better than Nifty Next 50. For instance, in 2008 and 2011, Nifty 50 had smaller declines compared to Nifty Next 50. This demonstrates that Nifty 50, with its large-cap stocks, is more resilient to market crashes than the mid-cap stocks in Nifty Next 50.

What are the long-term returns of Nifty Next 50 compared to Nifty 50, and should investors consider this when making their decision?

While Nifty Next 50 may show better long-term returns compared to Nifty 50 in some historical data, the difference in returns is not always substantial. Additionally, investors need to factor in the higher risk and the potential for lower returns due to the underperformance of many stocks in the Nifty Next 50 index. Thus, investors should consider both the returns and the associated risks before making their decision.