Index Investing In India TNIA Talk Part 2

Summary

In this insightful talk, the speaker from Frean Cal discusses the nuances of passive investing, contrasting broad market indices with strategic or factor indices. They caution about concentration risks in broad indices and data mining in factor indices, highlighting the importance of understanding the risks involved. The speaker also addresses misconceptions about ETFs, emphasizing the significance of price-based metrics over NAV for investors. They conclude by recommending a predominantly large-cap portfolio with a possible addition of Nifty Next50 for those seeking moderate adventure, while warning against the pitfalls of assuming higher risk leads to higher returns.

Takeaways

• 📉 Active funds often underperform: The majority of active funds in various categories fail to consistently outperform their benchmarks, highlighting the appeal of passive investing.
• 📊 Types of indices: There are broad market indices like Nifty, Sensex, and strategic or factor indices, which combine elements of active and passive investing based on certain investment factors.
• 💼 Index investing methods: Investors can choose to invest in index mutual funds or ETFs, each with their own advantages and considerations.
• 🏦 Concentration risk in broad market indices: The top 10 stocks in indices like Nifty can dominate the weightage, leading to concentration risk.
• 📉 Risks of factor indices: While factor indices can show strong performance, they are also subject to underperformance periods and data mining risks.
• 🕒 Time lag in investment trends: Investment strategies that are popular in the West may take time to become popular in India, which can lead to adopting strategies that are past their peak performance.
• 📉 Beware of tracking error: The common practice of calculating ETF returns and tracking error based on NAV rather than market price can be misleading for investors.
• 💼 ETFs vs. Index Funds: While ETFs offer trading flexibility, they may not always provide better returns than traditional index funds, even with lower expense ratios.
• 🔄 Importance of price-based metrics: For ETFs, it's crucial to consider price-based returns and tracking differences rather than NAV-based metrics.
• 🌐 Liquidity and tracking concerns: In times of market stress, midcap and small-cap funds can face liquidity issues and tracking difficulties, making them riskier than large-cap focused funds.
• 📈 Nifty Next50 as a substitute: For those seeking exposure beyond the Nifty 50, the Nifty Next50 offers a good alternative with better liquidity and less risk compared to midcap indices.

Q & A

What is the main argument presented by P from Frean Cal in the first part of his talk?

The main argument is that most active funds, approximately 50 to 60% in every category, are unable to consistently outperform a representative benchmark, which supports the idea that passive investing makes a lot of sense.

What are the two types of indices mentioned in the script?

The two types of indices mentioned are broad market indices and strategic indices or factor indices, also known as smart beta indices.

How does the selection and weighting of stocks in broad market indices work?

In broad market indices, the selection of stocks and their weighting are primarily based on market capitalization. The free float market capitalization is used, which is the total shares multiplied by the market price, and adjusted by the investable weight factor (IWF) to account for shares that are freely available for trading.

What is the concentration risk associated with broad market indices?

The concentration risk in broad market indices refers to the issue where just the top 10 stocks can govern 50 to 60% of the weightage of the index, which means that a few stocks can have a significant impact on the performance of the entire index.

What are the two methods of index investing discussed in the script?

The two methods of index investing discussed are investing in index mutual funds and investing via Exchange Traded Funds (ETFs).

What is the difference between strategic indices and broad market indices in terms of stock selection and portfolio management?

Strategic indices combine elements of active and passive investing. They have specific rules for stock selection, and once selected, the portfolio of stocks is passively managed. In contrast, broad market indices are selected and weighted based solely on market capitalization without any specific thematic or factor-based rules.

What factors are used in strategic indices to select stocks?

Factors used in strategic indices include value, quality, low volatility, momentum, and alpha, among others. These factors are used to select stocks based on specific criteria, such as return on equity, debt-to-equity ratio, and other financial metrics.

What is the potential issue with factor indices that the speaker's friend warned him about?

The potential issue with factor indices is that they are subject to data mining risks. The speaker's friend cautioned that these indices may become popular in India after they have already been exploited in the West, leading to a time lag where the effectiveness of the indices may have already decreased.

What is the difference between ETF NAV and ETF price, and why is it important for investors to understand this?

ETF NAV (Net Asset Value) is the value of the underlying assets of the ETF, while the ETF price is the market price at which the ETF is bought and sold. It's important for investors to understand this because they transact at the market price, not the NAV, and there can be significant price-NAV differences that affect the actual returns and tracking error of the ETF.

What are the general risks in passive investing according to the script?

The general risks in passive investing include curation risk, where the rules for stock inclusion can change, concentration risk, arbitrary definition of factor indices, and the risk of fund managers changing the total expense ratio of passive funds to attract assets and then increasing fees.

What advice does the speaker give regarding the choice between ETFs and index funds?

The speaker advises to stay away from ETFs unless you are a trader, as they are not designed for long-term investing due to liquidity and price management issues. He suggests that for long-term investing, index funds may be more suitable, but cautions that lower total expense ratio (TEA) does not automatically mean higher returns.

What is the speaker's opinion on the choice between Nifty 50, Nifty Midcap 150, and Nifty Next 50?

The speaker recommends sticking predominantly to Nifty 50 for most investors. For those looking for a bit of adventure, he suggests a small allocation to Nifty Next 50 due to its liquidity and tracking ease compared to the Midcap 150, which he believes has liquidity issues and is more difficult to manage in a crisis.

What is the speaker's view on the relationship between risk and return in investing?

The speaker emphasizes that higher risk does not necessarily lead to higher returns. Instead, it leads to the potential for higher risk returns, which may or may not materialize. Therefore, a better risk management and asset allocation strategy is crucial.

Outlines

00:00

📊 Passive Investing Nuances and Index Types

The speaker, P, discusses the concept of passive investing, noting that a significant portion of active funds fail to outperform their benchmarks consistently. The talk delves into the types of indices, including broad market indices like Nifty and strategic indices that focus on factors like value, quality, and low volatility. P highlights the importance of understanding the nuances of passive investing, such as the concentration risk in broad market indices and the potential data mining risks in factor indices. The speaker also touches on the time lag in the adoption of investment ideas between the West and India, which can lead to investors missing out on optimal returns.

05:02

🚫 Risks and Considerations in Passive Investing

This paragraph outlines the various risks associated with passive investing, such as curation risks where the rules for stock inclusion can change, and the arbitrary definitions of factor indices. The speaker also warns about the potential for asset management companies to adjust the total expense ratio, which could impact returns. P emphasizes the importance of being aware of these risks, including the possibility of underperformance in factor indices, and the need to be cautious about the tracking error and returns of ETFs, which are often misleading when based on the NAV rather than the market price.

10:02

📉 ETFs: Tracking Errors and Market Price Discrepancies

The speaker addresses the common misconceptions about ETFs, particularly the misunderstanding that ETF returns and tracking errors are based on the NAV, which is irrelevant for investors who buy and sell at market prices. P explains the significance of using price-based metrics for ETFs, as market prices can differ significantly from NAVs, leading to discrepancies in returns and tracking errors. The paragraph also discusses the importance of considering the liquidity and trading volume of ETFs, as less popular ETFs may have better tracking errors but could be less suitable for investment due to lower trading volumes and potential liquidity issues.

15:03

📈 Index Fund Selection: Midcap vs. Small Cap vs. Nifty Next 50

In this paragraph, P presents a comparison of different indices, emphasizing the historical performance of the Nifty small cap, midcap, and Nifty 50 indices over a 10-year period. The speaker suggests that the Nifty small cap index has not outperformed the midcap index, and thus, investing in small cap active funds may not be as beneficial as investing in the midcap index. P also discusses the performance of the Nifty Next 50 index, suggesting it as a suitable alternative to the midcap index due to its liquidity and ease of tracking, despite the potential for higher impact costs in the midcap segment.

20:04

💡 Final Takeaways: Stick to Sensex/Nifty and Consider Nifty Next 50 for Diversification

The speaker concludes with recommendations for investors, suggesting that sticking to a single Nifty or Sensex fund is sufficient for most, with the option to add Nifty Next 50 for those seeking a bit more diversification. P argues against the necessity of midcap and small cap funds, based on their historical inability to outperform the midcap index. The speaker also cautions against the assumption that higher risk always leads to higher returns, emphasizing the importance of a well-managed risk and asset allocation strategy.

Keywords

💡Active funds

Active funds are investment funds managed by portfolio managers who make active buying and selling decisions to outperform the market benchmark. In the video, it's mentioned that 50 to 60% of active funds fail to consistently outperform their benchmarks, which is a key argument for the speaker's advocacy of passive investing.

💡Passive investing

Passive investing refers to a strategy of investing in market indices with minimal or no effort to outperform the market. The speaker suggests that due to the underperformance of many active funds, passive investing is a sensible approach, as it typically involves lower fees and seeks to mirror the performance of a specific index.

💡Benchmark

A benchmark is a standard or point of reference against which investment performance is compared. In the context of the video, the speaker discusses the inability of many active funds to outperform their representative benchmarks, highlighting the appeal of passive investment strategies that track these benchmarks.

💡Broad market indices

Broad market indices are designed to represent a wide range of the market or a segment of it, such as the Nifty 500 or S&P 500. The speaker explains that these indices are based on market capitalization, which can lead to concentration risk, as the top stocks dominate the index's weightage.

💡Strategic indices

Strategic indices, also known as factor indices, are a hybrid of active and passive investing. They follow specific rules for stock selection, such as value, quality, or low volatility, and then manage the portfolio passively. The speaker cautions about the risks of data mining and time lags in the popularity of these indices.

💡ETFs (Exchange-Traded Funds)

ETFs are investment funds that are traded on stock exchanges, similar to individual stocks. The speaker discusses the importance of considering the market price of ETFs rather than their net asset value (NAV) when evaluating returns and tracking error, which is a common misconception.

💡Index mutual funds

Index mutual funds are a type of investment vehicle that pools money from multiple investors to invest in a portfolio that seeks to replicate the performance of a specific index. The speaker contrasts ETFs with index mutual funds, noting that the latter may be more suitable for long-term investors due to liquidity and pricing considerations.

💡Concentration risk

Concentration risk occurs when a portfolio's investments are heavily weighted towards a small number of stocks or sectors. The speaker points out that broad market indices can have concentration risk, with just the top 10 stocks governing a significant portion of the index's weightage.

💡Factor investing

Factor investing involves selecting stocks based on certain characteristics or 'factors' such as value, quality, or momentum. The speaker uses the example of the Nifty midcap 150 quality 50 index to illustrate the potential underperformance of factor indices and the importance of being cautious with these investments.

💡Tracking error

Tracking error measures the divergence between the performance of an investment fund and its benchmark. The speaker emphasizes that tracking error should be evaluated based on the ETF's market price rather than its NAV, as the latter does not reflect the actual buying and selling prices for investors.

💡Total Expense Ratio (TER)

TER represents the total costs associated with managing and operating an investment fund, stated as a percentage of the fund's average net assets. The speaker warns that lower TER does not necessarily equate to higher returns and that investors should be aware of the potential for fund managers to increase TER after attracting assets under management.

💡Nifty next50

Nifty next50 is an index that represents the next 50 stocks in terms of market capitalization after the top 50 Nifty stocks. The speaker suggests that Nifty next50 is a good substitute for the Nifty midcap 150 index due to better liquidity and ease of tracking, making it a preferred choice for investors seeking some exposure beyond the Nifty 50.

Highlights

Active funds struggle to consistently outperform representative benchmarks, suggesting passive investing is a sensible approach.

Passive investing involves two types of indices: broad market indices and strategic or factor indices, each with different characteristics.

Broad market indices like Nifty and Sensex use market capitalization for stock selection and weighting, leading to concentration risk.

Strategic indices combine active stock selection with passive portfolio management, focusing on factors like value, quality, and low volatility.

Factor indices are subject to data mining risks and may underperform during certain market conditions.

There's a time lag in the adoption of investment ideas in India compared to the West, which can impact investment outcomes.

ETF returns and tracking errors are often miscalculated based on NAV rather than market price, which can be significantly different.

The presenter recommends using price-based metrics for ETFs instead of NAV to accurately assess returns and tracking differences.

ETFs may not be suitable for long-term investors due to liquidity and price management issues, especially when compared to index funds.

The total expense ratio (TER) of passive funds can change, affecting returns, and fund managers may take on additional risk to compensate for higher TERs.

Nifty Midcap 150 has historically outperformed Small Cap indices, suggesting midcap indices as a better investment choice.

Nifty Next 50 has shown to be a close substitute for the Nifty Midcap 150, with better liquidity and ease of tracking.

Investors should be cautious of assuming that higher risk always leads to higher returns, emphasizing the need for proper risk management.

The presenter advises sticking predominantly to large-cap indices like Nifty 50 for long-term stability, with a possible addition of Nifty Next 50 for diversification.

Beating the market is challenging, and a single Nifty or Sensex fund may suffice for most investors, with Nifty Next 50 as an optional addition for those seeking more excitement.

Most midcap and small cap funds cannot outperform a midcap index, making Nifty Next 50 a relatively safer and more liquid choice.

Actively managed funds are generally not necessary for investors, as passive investing in broad market indices can be more effective.

Transcripts

hi I'm P from frean Cal so this is the

second part of the talk I gave to the

Tamil NAD investor Association in uh

March 2024 in the first part we saw that

most active funds uh about 50 to 60% of

them in every category is not able to

consistently outperform a representative

Benchmark therefore passive investing

makes a lot of sense but there are some

nuances to passive investing that we

should appreciate and that's what we're

going to talk about today so there are

two types of

indices broad market indices uh and uh

strategic indices or factor indices or

they're also called as smart vaa indices

and there are two types of index

investing uh you can invest in index

mutual funds or via

ETFs so the in the broad market indices

examples are Nifty sensex Nifty 100

Nifty 500 tt200

Etc uh the market capitalization is the

primary uh criteria for selecting the

stock as well as determining the weight

of the stock in the index the free float

market capitalization is used that is

the market capitalization is total

shares into market price the free float

market capitalization uh as govern as

defined by the NSE excuse me is the

market capitalization times something

called iwf investable weight factor

which is a measure of the amount of

shares that are freely available for

trading not held by the promoter not

held by the government etc etc uh the

problem with the broad market indices is

that about just 10 stocks the top 10

stocks will govern 50 to 60% of the

weightage if you look at the Nifty

stocks there just the top few stocks

will take up the bulk of the weight of

the uh index so there is a concentration

risk of course such risks are much

smaller than that of an actively managed

fund historically but still we should

know that it's

there so this is the index map index

family map of the uh nsse you have the

Nifty 500 the top 500 Stocks by market

cap out of that the top 100 Stocks by

market cap are the large cap the middle

150 the midcap the bottom 250 the small

cap and then there are subdivisions and

so

on now when it comes to strategic

indices this is a combination of active

investing and passive investing so there

are there are some rules which govern

the stock selection and then that

portfolio of stocks is passively uh you

know managed so there are several

factors like uh value Alpha quality low

volatility momentum etc

etc and these definitions as I have

pointed out several times before are

kind of arbitrary uh for example quality

is defined uh equality stock is defined

based on its return on Equity debt

equity ratio average change in profit

after tax um value is defined by high

Roc return on Capital employed uh low P

low PB High dividend deal etc etc of

course these are how you define a

quality stock or a value stock is

arbitrary now when these indices were

introduced I was pretty enthusiastic

about them and I've written several

articles and made some videos about it

but then I was quickly cautioned by my

friend who is uh a fund manager in uh um

in the west he told me that uh these uh

kind of indices are subject to data

mining risks and you should be careful

about before know before taking them

seriously and uh so I became cautious

and one of the very important points he

said was he said that the an idea is

introduced in the west then billions of

dollars are uh invested in that idea

then that idea turns sore the returns

start to decrease then people start

complaining about that idea only when

people start complaining about that idea

or recognize that that that idea is less

than ideal then only that idea gets

popular in India so there's a time lag

between when it some when something gets

popular in the west and when it gets

introduced in India and uh that is a

that's a problem so he told me to be

cautious about it and uh and just as he

predicted um I had shown that the Nifty

midcap 150 quality 50 index um is a

warning for Factor investing fans if you

look at the uh

midcap 150 quality 30 index that is 30

quality Stacks picked from the midcap

150 that's the black line compared with

the base index the Nifty midcap 150 the

red line uh since Inception you can see

that the quality index has done

extremely well however if you look at

the performance from April uh sorry

February 2022 or so early 2022 you can

see that the quality index has done

quite badly this is the time when the

mid cup index soed up in the last uh you

know year or so and so on but the

quality is index has not done well so

that is a risk of underperformance that

you have to be aware of in all Factor

indices including my favorite low

volatility uh index that's something

that you have to be uh careful about I

many of you may know that I like low

volatility investing and I have invested

in low volatility but uh I have to also

be aware that it will not work all the

time uh there is also a u quality 50

small cap 250 index 50 quality stocks

from the small cap 250 the red line

compared with the base index you can see

the red line has done quite well however

that that is uh that outperformance is

only recent if you look at the early uh

you know data uh it is not uh done well

so if you look at the time when there's

a there's a big bull run in the early

2000s the small cap Quality Index has

not done well so you have to be aware

that all Factor indices will go through

such periods

so General risks in passive investing

there is a curation risk uh the curator

can change the stock inclusion rules due

to mergers Dem mergers Etc they can

arbitr change the PB formula they can uh

there is a concentration risks that I

talked about then there is a U Know

arbitrary definition of the factor

indices themselves then the AMCs can

keep changing the total expense ratio of

passive funds at will they will keep the

te low to attract AUM once the AUM comes

in they will jack up the TR and that's a

risk that we have to be aware of then to

compensate for the higher and higher uh

total expense ratio the fund manager

will have to consider taking some risk

in the cash component of the fund for

example via stock lending to compensate

and get slightly higher returns but that

is a those are all risks of passive

investing of course these risks are um

small smaller compared to the

underperforming risk and the fund

manager risk in active funds however

they are risks and we should

recognize now uh coming to

ETFs one of the biggest problem I have

is that the ETF returns and tracking

error that you see everywhere is based

on the ETF nav we should understand that

the ETF nav has no relevance at all for

the ETF investor for the normal ordinary

ETF investor unlike a mutual fund in a

mutual fund there's only the nav and

that is important yes but in a

ETF uh there is an nav but you are not

going to get the units or you are not

going to sell the units back at nav you

are going to buy and sell at the market

price the price of the ETF and there

will be price na differences and this

can be a significant difference uh

people do not calculate the tracking

error and returns of the ETF using the

price which is the actual data and they

instead they use the na which is wrong

uh we have a tracking error screener

which takes care of that for

ETFs so to illustrate the point these

are the threeyear uh ETF price minus ETF

nav return so uh uh return Bas threee

return based on price minus threeyear

price uh threeyear return based on nav

price return minus nav return rolling

over three years and you can see the

significant difference um so that and

this is actually for one of the most

popular ETFs and this it can be more for

uh you know less popular ETFs which are

not trade out

often uh but and this is the same data

over 10 years and you can see that the

popularity in passive investing here

the the the return the 10e uh know price

minus uh nav return was as high as 2%

but that has now come down but it's

still significant over one or two years

and that can affect the way in which you

you know compute your returns and that's

bad so you can now see that uh when I

look at the tracking error based on nav

uh you can see and this is one of the

most popular ETF Nifty BS uh you can see

over one year two year three year 5 year

Etc the nav based tracking error is very

low but it jumps up by 10 times when I

look at the price based tracking error

so we should always look at the tracking

error and return based on the price and

not the

enable and uh this is the tracking

difference the tracking difference is

the fund return minus Benchmark return

again the the navb return minus

Benchmark return is shown here whereas

the price return minus the Benchmark

return can be significantly different

so that's why you should use always

tracking error tracking difference and

returns based on the price EDF

price so another example so a is uh most

popular Nifty ETF I think Nifty BS and B

is um some ETF I don't remember the name

uh which has got a 10 times lower uh AUM

and it's uh volume traded is about I

think 50 times lower if I'm not wrong

I'll check that up and and the AUM the

amount traded as on 13th March 2024 when

I looked at the data was 59 times

smaller so clearly etfb is a uh less

popular ETF but if you look at the

tracking error based on um uh uh you

know price just a tracking error alone

you can see that etfb has got a tracking

error which is better than etfa does

that mean uh etfb is better no not quite

so first you should use the price second

you should be careful with the tracking

error because the tracking error is a

metric that the fund manager has to use

to understand whether he or she is uh

close to the Benchmark performance but

for the investor all that matters is the

return difference so that tracking error

can be misleading uh etfb is

significantly less popular it is

significantly less traded but still it

has got a better tracking ER that

doesn't mean you should go invest in it

because if you look at

the uh the returns etfa which is the

most popular ETF has got better returns

slightly better returns obviously

there'll be not much difference and if

you look at the tracking difference etfa

has got the lower tracking difference so

that is why I keep telling people first

look at the price based so price based

metrics price based returns and price

based tracking difference that's the

most important Point don't look at

tracking error tracking error is not

something uh we can easily understand

because tracking error is defined as a

kind of like a standard deviation and

it's not something that it is intuitive

tracking difference is intuitive because

it's return difference I am paying money

how much return have I got compared to

the Benchmark that is very easy to

understand so always use tracking

difference and always use the price ETF

price to calculate returns and the

tracking

difference so the ETF wish list I had

already talked about the um EDF price uh

and the nav should be reported by ay the

AY only reports now price also should be

reported um the returns tracking error

tracking differences should be computed

with the price and not the now then the

regulator should uh police uh uh price

versus nav differences because there is

a authorized participant which the AMC

has has to you know push to reduce now

price differences in the market but the

regulator must keep an hold on this and

make sure that the AMCs are doing it

some AMCs do it very well some AMCs I

don't think they do it as

well uh then we have a comparison of um

an index

fund which is uh the red line I think I

think it's U nifty50 and uh the white

line is a popular ETF which is Nifty BS

so Nifty B having a TR of

0.04 and that's an index fund is a 21%

total expense ratio if you look at the

fiveyear rolling returns there's not

much difference between the two many

people will say oh lower TR immediately

buy blindly no it doesn't uh that's not

true an index fund charging 21% T can

easily match up to an EDF with 04 per T

however are they taking a little more

Risk by stock lending in the cash

component is a is a caveat how but that

said just don't go blindly by TR lower

TR does not mean automatically higher

returns that is not

true again over 10 years you can see

there's not much of a difference between

the

two so ETFs versus Index Fund the final

word my suggestion is please stay away

from ETFs unless you are a Trader unless

you want to uh buy and sell during

Market hours live uh there's no need for

ETFs just stay away from them because

you will keep investing in an ETF over

10 years 15 years then you will get five

CR six crores and you want to sell them

at some point you want to sell one CR

you can't immediately sell because you

have to gradually sell according to the

demand Supply forces on that day and so

on I mean that's not uh it's unnecessary

so unless you are a Trader I think you

should not invest in AES they're not

designed for that longterm in my opinion

because you don't have that kind of uh

you know liquidity and price now uh uh

you know

management then um the next question is

which uh index should I choose this is

my opinion many many people will agree

disagree with me already there are some

disagreements in the first part

especially young people they want oh

more of more of midcap more of small cap

um I would say no but then you can

dismiss me as an old guy but that's

fine so what you see here is the rolling

returns over 10 years of three indices

the Nifty small cap in green the Nifty

midcap in pink and the nifty 50 in

yellow you can see that the Nifty small

cap index has not bet the midcap at all

over 10 years and remember most active

small cap funds have not bet the pink L

most of them are below the pink L

whether the are active small cap funds

or active midcap funds they are below

the pink l so why would you invest in

a um actively manage small Cap Fund when

you have the midcap index why would you

next want an actively manage midcap fund

when you have the midcap index why would

you invest in a small cap Index Fund

when you have the midcap

index as for as of this dat of course

you have to invest in nifty50 just by

looking at this you can say some people

very nice say I want to put all my money

in midcap that is not true you need a

balance you must understand that U

midcaps has the potential to outperform

a large capap but that doesn't mean it

will happen all the time that doesn't

mean it will happen to you your

particular sequence of return may be bad

not you may not always get this huge gap

between this pink and yellow you may get

this kind of a gap between pink and

yellow what will you do so for that to

take into that into account you should

always have a good chunk of large caps I

would say dominantly large cap 100%

large cap is also absolutely fine but

young people will not listen to me they

say oh I want this I want that there's

always four more you can't get rid of

that so this trend is also seen in the

US now um where there is a small cap not

beating the midcap so you can see that

the white line is the small cap index

the um the brown line is the midcap

index and the rose line uh is

the uh the pink line is the the large

cap index the S&P 500 so you can see

that the um midcap has uh consistently

outperformed the small cap so it's

there's no need for small cap indices

definitely and definitely no need for

small cap active funds when you have the

midcap index question is whether should

you invest in the midcap index when you

have Nifty next 50 that is the question

that uh we'll have to answer which we

shall do now so now this is a comparison

of nifty small cap 250 versus Nifty

next50 or 10 years except for the recent

last one year or so the Nifty next50 has

done quite well and I will be very happy

to use a Nifty next50 instead of a small

cap Index Fund or even a small cap

actively managed small Cap Fund I have

shown that Nifty next50 does well

compared to many actively manage small

cap funds as well um don't assume that

this outperformance will last for it

will come down

so uh now comes the most important graph

I would say this is a comparison of

nifty next50 versus Nifty midcap now I

have always maintained that the Nifty

next50 is a very good substitute for the

Nifty midcap 150 index now that has

turned out to be true for a large part

of the history of both indices where you

can see that the pink line and the uh

yellow line have been almost on top of

each only in the last few years has the

midcap index really moved away from the

Nifty

next50 what does this mean is this going

to be always the case I don't know will

it come down I don't know uh does this

mean the Nifty next50 has become less

volatile because of more Market

participation is Nifty midcap a better

choice than Nifty

next50 I would say we don't yet have

enough data to factually say something

about it uh but if you ask me I would

still pick the Nifty next50 compared to

the Nifty midcap index because midcap

has got 150 stocks you have liquidity

issues in the midcap segment uh the none

of the actively M sorry none of the

sorry excuse me none of the passively

managed midcap index or small cap index

has ever seen a big crisis Nifty next50

has niy next50 passive funds have seen

crisises in 2020 20 eight and so on but

the the passively managed mid and small

cap funds have not seen a crisis when

there is a big crisis in these segments

there will be liquidity issues there can

be huge uh problems for the fund manager

in tracking those stocks 150 stocks 250

stocks and so on so I would prefer uh 50

stocks of niy x50 if I want if my hand

is itching uh and I say I want something

extra compared to nifty50 otherwise I

will my my strong advice is stick to the

sensex to the Nifty predominantly that

is enough for you there's no need for

any other index but if you feel that you

are missing out on something long-term

potential and so on as some people claim

then you can buy uh Nifty next50 there's

no need for Nifty midcap I don't know

whether this out performance will last

it'll come down I have no I'm not saying

all that I'm only saying just based on

the point of the liquidity issues in

midcap and the ease of tracking 50

stocks compared to 15 50 stocks as on

date I would still prefer and recommend

the Nifty next50 I'm sure many of you

will disagree with me but that's

fine and this is the comparison of the

nift X15 now in green versus the nifty

50 in uh in

yellow generally there is a reasonable

chance of the Nifty next50 outperforming

the nifty50 but not always this is true

for small caps midcaps whatever it is

not always always that that is why you

should always have your portfolio

predominantly in large caps only in

large caps also is fine but

predominantly in large caps take a

little little extra by Nifty next50 okay

if you want Nifty midcap go ahead and

invest in it but don't expect it to

always outperform and don't look at the

last one year two years return and uh

you know uh push in a lot of money and

be careful when you use the Nifty midcap

index fund that when there is a crisis

there will be there could be

difficulties of liquidity and the now

will fall higher than the index for

index itself so you to be careful about

these uh issues before choosing my

recommendation is sff uh stick to sorry

stick to sensex or Nifty if you want

some Adventure which I do not recommend

if you do want it then little bit of um

Nifty next50 is enough nothing more than

that uh many people keep assuming that

higher risk leads to higher

return no higher risk only leads to

higher risk returns may or may not occur

that is why you need a much better risk

management asset allocation strategy

I've talked about this several times you

need to start decreasing your Equity

allocation well before your go deadline

you should have conservative return

estimates conservative asset allocations

Etc but that's that so I think that's

all I have to say one more slide I don't

know so uh final takeaways beating the

market is not easy a single Nifty or

sensex fund is enough if you want more

excitement add a Nifty x50 most midcap

and small cap funds cannot beat a midcap

index Nifty next50 returns are close to

a midcap Index Fund Nifty next50 is

relatively safer compared to a midcap

index because uh uh it has got better

liquidities closer the large cap than

the midcap although uh you know the

impact costs are high impact cost means

that uh um if I try to uh buy and sell

large quantities of uh shares then there

will be a big difference between the bid

price and the ask uh buying price and

the selling price and that's called the

impact cost in India aside from the top

10 to 15 stocks the large cap the impact

cost significantly increase uh so that

the that's why the liquidity crisis

comes that is when you're not able to

buy or sell large amounts of uh midcap

stocks and so on that crisis can also

occur in Nifty next50 but it is

relatively better than a midcap or a

small cap

obviously actively manage funds are not

necessary that's that's about it