What is Nifty Next 50 Index Fund? Meaning, Benefits & Risks Explained

If you are already familiar with the concept of large-cap investing, then you are probably also aware that the typical path for beginners is to begin with the funds tied to the largest companies in the market. But what comes next? That’s where the Nifty Next 50 Index Fund comes into play.

It’s essentially the “next line of leaders” that comprises companies that may not be part of the top 50, but are almost there. These businesses have tremendous potential and could be tomorrow’s stock market leaders.

For investors looking for an option that’s slightly more than the basics, yet not as risky as others, this category provides an ideal middle ground. In this blog, we will discuss what is Nifty Next 50 index fund, its benefits, risks, and when this fund is best suited for.

Understanding the Nifty Next 50 index

In order to understand this fund, one has to understand what this fund is tracking. The Nifty Next 50 Index comprises companies that rank right after the top 50 companies of the general market index. These companies rank from 51st to 100th based on their capitalisation.

These companies are:

Well-established but still growing
Market leaders in their specific sectors
Future potential to enter the top 50

Therefore, the index represents stability as well as growth opportunities.

Understanding Nifty Next 50 index fund

It is a type of mutual fund that primarily invests in the same 50 companies participating in the Nifty Next 50 Index. The idea is very simple: the fund tries to replicate the performance of the Nifty Next 50 Index as closely as possible.

It does not try to beat the market, as it just uses a passive investment strategy. This means:

No active stock picking
No frequent buying and selling
Lower management costs

The fund invests in all 50 companies in the same proportion as the Nifty Next 50 Index. This means if a particular company is overweight in the index, it will also be overweight in the mutual fund.

How it works in real life

Suppose that you have invested ₹10,000 in a Nifty Next 50 Index Fund. In this case, your money is not invested in one or two stocks. Instead, your investment is spread over 50 different companies.

For example:

A bigger company may receive ₹500-₹700 of your investment
A smaller company may receive ₹100-₹200 of your investment

This way, even if one of those companies does badly, it does not affect your investment.

Why investors consider this fund

Now that you know what is Nifty Next 50 index fund, here is a brief overview of what this fund offers that makes it worth considering:

Entry before full maturity

These businesses are already established but haven’t reached maximum saturation in their growth. This means there is potential for growth in revenue and value.

Growth tilt compared to the top 50

These companies may demonstrate stronger business growth than the top 50 companies, which could translate into stronger long-term investment potential.

Balanced spread across companies

The investment is spread out across 50 companies, so if one company underperforms, it’s not as significant since we’re still able to benefit from overall growth.

Efficient cost impact

Since no active stock selection takes place, the cost of managing the fund stays low, allowing more of your money to work for you over the long term.

Risks you should know

Here are the key risks in a practical manner, along with the behaviour of the index in real markets:

Higher volatility than large caps

The Nifty Next 50 index is known to fluctuate more than the Nifty 50. It may move up more quickly, but it may also move down more quickly.

Sector concentration risk

Some sectors, such as financial services, capital goods, and consumer goods, tend to have more weightage in the index. If these sectors are not performing well, the entire performance may be impacted.

Market dependency

The Nifty Next 50 Fund replicates the index and hence behaves exactly as the market does. In times of low market performance, such as during the COVID-19 pandemic in 2020, when the Nifty 50 lost 40%, the performance of the Nifty Next 50 was also low, indicating that it is highly sensitive to market swings.

Uneven performance cycles

The performance of the Nifty Next 50 may not always be superior every year. There may be instances when the performance of the Nifty Next 50 may dip for a year or two before gaining momentum and providing stronger performance.

Who should invest in this fund?

This fund is not for all, but it is suitable for certain investors.

Investors with a medium or long investment horizon (i.e., 5 years or more).
Investors who are already invested in large-cap funds.
Investors who are willing to take the ups and downs in the short term for better returns in the long run.

Things to check before investing

Before you start investing, take a look at these factors, which are crucial:

Expense ratio

If the expense ratio is low, it means that more of your investment remains invested.

Tracking error

This measures the fund's correlation with the index. Lower tracking error is always preferred.

Fund house reputation

It's worth selecting an asset management company that's reliable and has a good reputation.

Investment method

There are two ways to invest: through SIP (Systematic Investment Plan) or a lump sum. It is better to go with SIP as it is less risky.

When can this fund perform well?

This fund performs well in:

Economic growth phases: In this phase, companies grow rapidly as economic activity increases.
Bull markets: The rising stock market increases the confidence of investors, thus pushing up the stock prices.
Rapid growth of mid-to-large companies: Companies growing rapidly mean good earnings, thus good returns.

When should you be careful?

Be cautious during:

Market corrections: There may be sharp corrections in the stock markets, and the value of the fund may be affected in the short term.
Economic slowdown: The growth rate may be affected, impacting the performance of the companies.
High volatility phases: Frequent changes in the markets may result in unpredictable short-term performances.

Since these companies are in the growth phase, they may be more vulnerable to unfavourable market conditions.

Wrapping up

The Nifty Next 50 Index Fund presents a golden opportunity that is positioned just in the middle of stability and growth. The fund is not as stable as investing in the top 50 companies, but at the same time, it is not as risky as investing in small-cap shares either.

If you are willing to take one more step in your investment journey, then this is a great opportunity to include this fund in your portfolio. It is a great way to benefit from the growth of new leaders without having to be experts in the market. The key is to be patient. If you are patient enough, this investment option can prove to be a great addition to your portfolio.

FAQs on Nifty Next 50 Index Fund

Is the Nifty Next 50 Index Fund safe?

It is a relatively safer investment when compared to mid-cap or small-cap funds, but is riskier when compared to Nifty 50 funds due to greater volatility.

What are the key features of a Nifty Next 50 Index Fund?

Here are some of the features.

Passive tracking of the Nifty Next 50 Index.
Investment in 50 companies ranked 51st to 100th by market capitalisation.
Diversification across sectors with growth-oriented companies.
Low expense ratio due to a passive investment strategy.

Who should consider investing in this fund?

Investors with a medium or long-term investment horizon (i.e., 5 years or more) and those who are already invested in large-cap funds and are ready for short-term volatility.

Can beginners invest in this fund?

Yes, beginners can invest in this fund; however, it should be as per their risk appetite and goals.

How is taxation applicable for this fund?

Short Term Capital Gains (STCG for holding < 12 months): Taxable at 20% + cess.
Long Term Capital Gains (LTCG for holding > 12 months): Up to ₹1.25 lakh for each financial year exempt from tax. Gains above ₹1.25 lakh will be taxed at 12.5% + cess.