Nifty 50 or Nifty Next 50 index funds - Which is better?
5paisa Research Team
14th December 2022 - 10:47 pm
It's often confusing to choose between Nifty 50, Nifty Next 50 and Nifty 100 index funds. Read on to find out more.
Passive Investment is a multi-trillion-dollar industry globally. Even in India, it has started gaining momentum, specifically in the largecap segment. This can be very well attributed to its low-cost structure and risk-reward being similar to that of the index. Moreover, even the move of the government to allow the Employee Pension Scheme and National Pension Scheme to hold more equities via passive investments have boosted the assets under management (AUM) of the passive investments. As every investor wishes to catch the bus of equity amid its exceptional returns in recent times, the asset management companies (AMC) came up with many passive funds tracking different indices.
In the largecap category alone, National Stock Exchange (NSE) has over 25 index funds and over 30 exchange-traded funds (ETFs). The majority of the largecap biased passive funds either track Nifty 50 or Nifty Next 50. This makes it difficult for investors to choose between the two.
To understand the same, we have looked at the performance of both the indices from returns as well as risk perspective. The period of study spans from December 2011 to November 2021.
|
Indices |
Median Rolling Returns (per cent) |
||
|
1-Year |
3-Year |
5-Year |
|
|
Nifty 50 TRI |
13.13 |
12.34 |
13.24 |
|
Nifty Next 50 TRI |
14.97 |
16.58 |
16.33 |
We have calculated one-year, three-year and five-year rolling returns of Nifty 50 Total Returns Index (TRI) for the above-mentioned study period. Moreover, we have taken median of all the instances to understand its consistency. So, in terms of return, hands down Nifty Next 50 TRI is better than Nifty 50 TRI. This is one side of the coin, now let us look at the other side of the coin, that is risk.
|
Risk Metrics |
Nifty 50 TRI |
Nifty Next 50 TRI |
|
Standard Deviation |
20.50 |
21.66 |
|
Downside Deviation |
16.43 |
17.30 |
|
Maximum Drawdown |
61.98 |
67.66 |
|
Sharpe Ratio |
0.79 |
0.98 |
|
Sortino Ratio |
0.99 |
1.23 |
We have considered risk metrics such as standard deviation, downside deviation, maximum drawdown, Sharpe ratio and Sortino ratio for evaluating the risk part of both the indices. As you can see in the table above, in terms of risk as measured by standard deviation, downside deviation and maximum drawdown, Nifty 50 TRI is better in containing the downside risk as compared to Nifty Next 50 TRI.
However, in terms of risk-adjusted returns as measured by Sharpe and Sortino ratio, Nifty Next 50 TRI scores over Nifty 50 TRI. Hence, if you are a conservative investor with lower risk tolerance, Nifty 50 TRI is better for you, while others can consider Nifty Next 50 TRI. Having said that, it is prudent to have a combination of the both, as a little addition in risk can help you get better returns than that of Nifty 50 TRI alone.
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Tanushree Jaiswal
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