Nifty Next 50 – what should you do with your investments?

The Nifty Next 50 houses the 50 top companies by market capitalisation, after the Nifty 50. This index caught the limelight over the past month for featuring a handful of the Adani group stocks. 

As we had pointed out a couple of weeks ago in our write-up on Adani stocks and index funds, the presence of a few shaky stocks in an index is not reason enough to exit it. But even before the Adani-fuelled upheaval, the Nifty Next 50’s once-outstanding performance was being eroded.

Nifty Next 50 - what should you do with your investments?

The Nifty Next 50 index forms part of Prime Funds, Prime ETFs, and different Prime Portfolios.

In our view, a call on an index needs to come from its performance, how it compares with other opportunities, and how it fits in a portfolio. We have been tracking the performance of the index for a few quarters and have studied the stock movements in the index and their impact on returns. Based on this, we are now changing our call on the Nifty Next 50 to a hold. That means, you can hold investments made so far but avoid investing further. 

This report contains:

Nifty Next 50 – explaining performance

The Nifty Next 50 was intended to be an index that delivered returns much higher than the Nifty 50 or the Nifty 100 and closer to the mid-cap market segment. It straddled the middle ground of picking up stocks that were rallying in the midcap basket, but it also caught the laggards from the Nifty 50. That made it an outperformer on the upside, poor at containing downsides, and high on volatility. That also means the index is essentially a high-PE index.

The Next 50’s rolling 1-year return has been slackening in performance over the past few years, just about keeping pace with the Nifty 50 and then underperforming in the past year. Still, going by its strong historical performance, its 5-year rolling return outperformance over the Nifty remained strong (4-8 percentage points of outperformance in the 2016 to 2020 rolling period and higher before that) up until 2020. It managed to stay marginally ahead of the Nifty 50 even up to 2021. That means those who had invested in this index and held for several years would still have beaten the Nifty 50. 

Against the Midcap 150, the mid-cap fueled market rally saw the Next 50 fall well behind in the past few years. While the Next 50 had earlier beaten the Midcap 150 with some amount of consistency – based on rolling 3-year returns (it outperformed the Midcap index about half the time on an average), the Nifty Midcap 150 has thoroughly trounced the Next 50 index since.

The sliding returns of the Nifty Next 50 especially over the past year has pushed it below both the Nifty 50 and the Nifty Midcap 150. The Next 50 has been trailing the Nifty 50 by a margin of 3-10 percentage points on a 1-year basis.

So, what has led to this kind of dip in performance? No, it’s not just the Adani stocks! It is the Next 50’s very structure that drove its earlier performance that is causing current underperformance.

We broke down the Next 50 and the Nifty 50’s composition over several years to understand this. Here are the top reasons that are causing the Next 50 to perform the way it has!

#1 High churn

Consider the two points below:

  • For the Nifty 50, there has been 60 unique stocks in the last 5 years. About 41 stocks stayed common throughout the 5-year period.
  • For the Nifty Next 50, there has been 104 unique stocks in the last 5 years. Only 16 stocks were common throughout the 5-year period

This data shows you the extent of churn the Next 50 sees. This throws the longevity of stocks in Nifty Next 50 into question as it reflects that too many stocks are underperforming - companies get removed due to underperformance rather quickly, as it hits their market capitalisation. Remember, Both the indices mentioned are market-cap based indices and stocks would exit if their market capitalisation fell due to price falls.

Further, it’s not easy for a stock to move up from the Nifty Next 50 into Nifty 50; the entry barrier to the Nifty 50 is high due to large number of high market cap companies with stability and leadership. That means the Next 50’s return needs to come from the performance of stocks that move into it from the mid-cap basket (Next 50 stocks were once mid-cap stocks). 

If a mid-cap stock entering the Next 50 has already lost steam (cannot move to the next phase of becoming a large cap), then it is not doing enough by way of performance. And if it underperforms, it cannot hope to be in the Next 50 for long. That means a stock may enter the Next 50 and simply stay put or underperform post and exit.

#2 A gateway-plus-recycle bin

The Nifty Next 50 is the gateway to Nifty 50 as well as a recycle bin to stocks exiting the Nifty 50. What if some of the companies entering Next 50 don’t make into Nifty 50? They may either stay in Next 50 itself or get out of it if they underperform.

A stock getting into the Nifty 50, from the Next 50, is basically a stock that is rallying. So all good there. You enjoy the returns in the Next 50 for a while, before it upgrades to the Nifty 50. But stocks that exit the Nifty 50 get pushed to the Next 50. Do remember that a stock exits the  Nifty 50 either because a better stock with larger market cap has replaced it or it has not done well and there might already be trouble brewing in the stock. Such troubled candidates that enter the Next 50 can spell havoc. Let us look at both the cases in the respective tables given below.

The stocks in the second table above have done little to help the Next 50’s returns; these were those exiting the Nifty 50 owing to performance issues and simply continued with losses. While this is par for the course given the index construction, the performers exiting the Next 50 combined with the several underperformers within the index weighed on returns. See the next point.

#3 Causing havoc before exiting

Stocks entering the Next 50 which turned out to be sedate performers or underperformers have also capped the index’s returns. Some came in from a move up from the Nifty Midcap 150. Several, though, directly entered into the index through IPOs and with many of these tanking post the IPO boom, the impact on returns was harder. 

The table below shows some stocks that entered the Next 50 and exited (as of October 2022) over the last 5 years - without moving to the Nifty 50. The ones entering and exiting the Next 50, without making into Nifty 50, seem to be significantly hurting performance, even as the stocks that exited with reasonable returns may not have made huge difference to the index’s performance. 

(Please note that some of the stocks listed here may re-enter the Next 50 ).

Now consider the IPOs. The table below shows the list of IPOs that directly debuted in the Next 50, only to entirely capitulate post listing. While some of these are set to exit the index in the rebalancing effective March 31st, they have meanwhile wreaked a good bit of damage to returns.

We rarely see such huge hits in a large number of stocks in a short span, and then exiting in losses. It also did not help that the Next 50 had limited share of banking, a key sector outperformer over the past year, and a heavy weight to those such as FMCG and chemicals that have been flat. 

Returns have further eroded since the Adani group fiasco decimated the group’s stocks. The Next 50 holds Adani Transmission, Adani Green, and Adani Total Gas – apart from Ambuja Cements, which the Adani group took over. At the start of January, these stocks had a weight of about 9% in the Next 50 (14%, if ACC and Ambuja Cements are included). The precipitous fall of 50-60% shaved off close to 5% of returns for the Next 50. Though some of these are ticking up now, if they eventually get shunted out of the index, it will simply be a repeat of the poor performance explained in the previous point.
The semi-annual review of the index, which will be effective at the end of this month, will see some of the underperformers move out. For example, Bandhan Bank, Gland Pharma, Mphasis, Biocon India, and One97 Communications will exit the index. ABB India, Adani Wilmar, Canara Bank, Page Industries and Varun Beverages will move in.

Nifty Next 50 – what to do with your investments

Going by recent 1-month returns, the severe underperformance of the Next 50 against at least the Nifty 50 appears to be narrowing. This is partly driven by strong returns clocked by some index constituents such as GAIL and HAL, as well as minor gains by top index weights.

Even so, there are the following aspects to consider:

  • The extent of the underperformance has been steep and recovery from here, to beat the Nifty 50 will still take time. If the underperforming stocks continue to remain in the index (as explained in point #3 above), returns may still be subdued against the Nifty 50.
  • That the index is a high-PE one at a time when growth-style stocks are staying out of market limelight can also weigh on returns.
  • For high returns, the Nifty Midcap 150 is a good alternative. On a rolling 3-year and 5-year basis, the Midcap 150 beats the Next 50 about 90% of the time. While the mid-cap segment is more volatile, given the Nifty Next 50’s current performance, it can well be a worthy compromise. This apart, the lower individual stock weights in the Midcap 150 will help limit the impact of underperformance that is plaguing the Next 50. The Midcap 150 will also capture the up-move of stocks making it to the Next 50. 

In order to avoid further opportunity loss, we are changing our call on the Nifty Next 50 to a hold. The action to be taken in each of our recommendations is as follows.

Prime Funds

We have ICICI Pru Nifty Next 50 and UTI Nifty Next 50, in the Equity Aggressive section. We have removed both from the Prime Funds list. Hold all investments made so far in the funds. Avoid increasing exposure here, which means you can stop any SIPs you have running. Instead, use the Motilal Oswal Nifty Midcap 150 index for fresh investments. For a less-volatile alternative, consider the Edelweiss Nifty LargeMidcap 250 index or the Motilal Oswal Nifty 500 index. All are part of Prime Funds. 

Prime ETFs

We have Nippon India ETF Nifty Next 50 Junior BeES, in the Equity High Risk section. We have removed this ETF from Prime ETFs. Hold all investments made so far, and stop any SIPs that are running. Use the Nippon India ETF Nifty Midcap 150 for fresh investments. There are no other quality ETFs available other than the Midcap 150; therefore, ensure that your exposure to the mid-cap space is within your risk level.

Prime Portfolios

The Nifty Next 50 index features in several of our portfolios. In some of these, in earlier reviews, we had already reduced weights to the index. We are now removing the index from the portfolios – but hold all investments made so far and don’t exit. Stop any running SIPs, and start it in the new replacement fund.

We have recommended changes specific to the requirements of that portfolio. In some cases, we have adjusted weights of the other funds in the portfolio and in others we have replaced the fund/ETF altogether. We’ll provide a more detailed explanation of the rationale behind the changes as part of our overall explanation in our next quarterly review that is due in April.

For now, you can click on the portfolio you are keen on or invested in, to know the action to be taken:

The reason why our recommendation is a hold (and not a sell now) is simple. One, the high -valuation IPO stocks and the underperformers can exit with time leaving the index with better performers that are indeed emerging large-caps. Hence a sell is not required at a time when there is a chance for the index to auto correct itself. And it is likely doing such an auto clean now. If another slew of high-premium IPO stocks hit the index, then we might want to take a relook 😊 We will keep you posted if any further change is needed.

General disclosures & disclaimers

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33 thoughts on “Nifty Next 50 – what should you do with your investments?”

  1. Useful article. Thanks.
    How about UTI Midcap Quality 50 Index Fund. Can it be considered as a better alternative to MC150 Index, as the possibility of tracking error in MC150 is on higher side.

    1. primeinvestor_psswwp

      Quality 50 is ‘factor investing’. If quality fails (Like value fails sometimes) it fails. It cannot be a substitute for Midcap 150. the marketcap ranges are also different. Mid and small cap indices will have higher tracking error. It will change only when liquidity in these stocks improve in India.Vidya

    1. We have said hold and stop SIPs in those portfolios. We don’t see any harm if you continue provided exposure is not very high (like 20-25% in your overall equity exposure. Please note we have said that the fund may well bounce back. We just want to make sure that another set of poor performers don’t enter it, like it happened with the e-com boom. thanks, Vidya

  2. Hello,
    Just for clarification
    Some time back when inquired about NRI ( Canada and USA) investments the ICICI prudential amc declined to accept investment.
    Also will be thankful if you can enlighten on the amcs accepting investments from USA and Canada based NRIs
    Regards

  3. Thanks Primeinvestor for bringing this up!

    I follow a simple rule which always works:

    One cannot get more than debt returns from equity in the period when momentum disappears in broader equity indices.

    Which means other than Next 50, one should hold further investments in mid caps, small caps as well, to keep opportunity loss and equity risk on lower side and focus on where the opportunity is at the moment, which is debt.

  4. 1. I have been taking the advice on funds seriously and investing accordingly. However, I find even the funds mentioned in more than 7 years portfolio are being replaced and put on hold in less than one year. I bit of concern for me. Like the Nifty next 50 index, DSP Midcap, Axis Bluechip, etc.
    2. I would also like to know the rationale behind different recommendations for NRI customers.
    Regards
    Sanjay

    1. Bhavana Acharya

      The funds in Prime Portfolios don’t see that quick a change unless the circumstances are so – like inflows stoppage or any governance or portfolio-related problem. The 7+ year portfolio has seen only two changes since the beginning – to introduce the Next 50 back in 2021 to replace an underperformer and to remove it now. We don’t move funds out of Prime Funds unless the underperformance is too steep to recover from quickly – in the case of DSP Midcap and Axis Bluechip, for example, the gap between the fund and the index/category was in double digits. The return penalty for continuing to invest more in these funds can thus be heavy – and both these funds were in Prime Funds for over 2 years before we moved them to hold. We always look for performance trends, reasons behind the performance, what the recovery can be and so on before we move to hold or sell. It’s never a knee-jerk reaction.

      For NRI portfolios, those living in the US/Canada have fewer AMC options due to regulations, so we have separate portfolios. – thanks, Bhavana

  5. Thanks for detailed article.
    I have few queries —
    1) What does high PE index mean and its associated with returns ?
    2) What are criteria for a stock to qualify in nifty next 50 apart from market capital ? and does it consider sector wise allocation ?
    3) How and when to use total return index and rolling over return when we look at mutual funds performances ?

    Thanks

    1. 1. A high PE can either mean that earnings are low and price has run up or that the market is affording this PE expecting earnings to catch up. One has to view it in the context prevalent then.
      2. Please go to niftyindices.com to known more about how Next 50 stocks are selected. There is no other criteria. it is only liquidity and marketcap.
      3. Please read this https://www.primeinvestor.in/varsity/mutual-fund-rolling-returns-3-things-to-know/ and https://www.primeinvestor.in/varsity/mutual-fund-ratios-how-to-use-them/

  6. Vidya Mam would not these stocks which exit Nifty Next 50 move to Nifty Midcap 150 & Nifty 500 , hence it is much better to be in direct funds rather than bieng in Indexes. What proportion should one allocate to Index funds as compared to Direct Mutual funds in ones portfolio

    1. Bhavana Acharya

      Small clarification first – there are index funds (also called passive funds) which track a particular index and active funds which aim to beat the index. There are direct and regular plans in both passive and active funds. So it’s not index and direct funds, but index and active funds. Yes, stocks exiting the Next 50 could move to the Midcap 150, but the effect here will be far more dissipated due to lower weights and the rallying stocks in the index can make up for it. In going active alone, the risk is that the fund does not beat the index. If you’re fine with this, then you can stick to active midcap funds instead of the Midcap 150 index. Otherwise, the Midcap 150 is a good index to hold. The allocation to active and passive depends on the portfolio. – thanks, Bhavana

  7. A nice article with lots of detailing and research I would say. While the advice to hold current Nifty Next 50 investments and to make fresh investments into Midcap 150 is understood , pls let me know if it makes sense to add M100 thru ETF route to dilute the composition/share of Next 50 in the proposed portfolio and finally achieving the same goal of creating a good Midcap 150 portfolio. Isn’t adding M100 into the current portfolio in appropriate quantities same as that of buying Midcap 150 ETF afresh?

    1. Bhavana Acharya

      Assuming that your question is if you can use the Nifty Midcap 100 index instead of the Nifty Midcap 150. Between the two, the Midcap 150 is the superior index, and returns higher. So it’s better to use the Midcap 150. The Midcap 150 is the full representation of the midcap basket (101st to 250th stock by marketcap). The Midcap 100 comprises 100 stocks from the Midcap 50 index plus 50 from the Midcap 150 based on average turnover. There’s no overlap between the Next 50 and the Midcap 150. – thanks, Bhavana

  8. So much for the expert advices !

    Does not inspire much confidence when you glorify a index fund first and then also find holes in it, especially when it underperforms. Your this analysis would have made an ‘expert analysis’ had it been made when things were rosy, not now.

    It also means that you are not having much idea about what to expect realistically over long term when making a recommendation. That is why you change your recommendation (be it funds or stocks) so frequently, as you end up meeting something unexpected very frequently.

    May be Sometimes advice for not doing anything may be more required than doing something.

    Long live the Long Term investments !

    1. At a time when the index has been dubbed for underperformance, we have dug deeper into understanding it and have been open enough to recognise what we haven’t before. If that involves changing our mind, we will do it.
      We do not make frequent call changes as you have stated. Our calls come after several quarters of fund observation. And we do not do knee jerk reactions (like several did post Adani). So there is not much for us to refute what you said. Long term investing is ALL ABOUT STAYING INVESTED. Not necessarily about staying invested in the same fund/stock 🙂
      Thanks,
      Vidya

      1. jatin.mehta1501

        Hi Vidya… Appreciate the well analysed ‘Hold’ call taken by Team PI on NN50 which used to be darling of passive investors in the years gone by. Stock market is a very fluid & slippery place to be in, it calls for hand holding for DIY investors.
        The valuations given to new age start-ups during IPO which catapults them into NN50 has been one of the nemesis for NN50 in present times. We are in that period of time when many disruptive technologies will come into play, few will disrupt and others will be destroyed. All IPOs should have a cooling period of, say 1 year, before it finds a place in any index.

        Please do keep taking such insightful calls to weather the vagaries of dynamic stock market.

        Regards .. Jatin

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