Nifty 50 Index Funds vs Nifty Next 50 Index Funds: Key differences explained

Investing in index funds is one of the ways to grow wealth over time, especially for those who want to avoid the hassle of picking individual stocks. Two of the most popular index funds in India are the Nifty 50 Index Funds and the Nifty Next 50 Index Funds. While both track different segments of the stock market, they offer unique advantages and risks. This article will explain the key differences between these two types of index funds in simple terms.

• Table of contents

1. What are Nifty 50 and Nifty Next 50?
2. What are Index Funds?
3. Key differences between Nifty 50 and Nifty Next 50 Index Funds
4. Which one should you choose?
5. Can you invest in both?

What are Nifty 50 and Nifty Next 50?

Before understanding the differences, let's understand what Nifty 50 and Nifty Next 50 are:

• Nifty 50 is an index that represents the top 50 companies listed on the National Stock Exchange (NSE) based on market capitalization. These are India's largest and most established companies.
• Nifty Next 50 consists of the next 50 largest companies after the Nifty 50. These are large cap companies that have the potential to grow and enter the Nifty 50 in the future.

Also Read: A guide to taxation on Nifty 50 index funds

Also Read: Nifty Next 50 index fund: Another vehicle to potentially grow your wealth over long term

What are Index Funds?

Index funds are mutual funds that mimic the performance of a specific stock index. They invest in the same stocks as the index they follow, in the same proportion. This makes them a passive investment option with lower costs compared to actively managed funds.

Key differences between Nifty 50 and Nifty Next 50 Index Funds

1. Composition of stocks

• Nifty 50 Index Funds invest in India’s largest, most well-established companies.
• Nifty Next 50 Index Funds invest in companies that have the potential to become future Nifty 50 stocks.

2. Risk and volatility

• Nifty 50 is relatively less volatile because it consists of relatively stable, large cap companies that have been in the market for a long time.
• Nifty Next 50 is comparatively more volatile because it includes companies that are still growing and are more sensitive to market changes. While this increases the potential for higher returns, it also means higher risks.

3. Returns potential

• Nifty 50 Index Funds provide relatively stable returns over the long term due to their focus on well-established companies. These funds have historically offered returns of around 10-12% per year. However, past performance may or may not be sustained in the future.
• Nifty Next 50 Index Funds have a higher potential for growth as they contain emerging companies. Over the years, they have sometimes outperformed Nifty 50, with historical returns ranging between 12-15% per year. However, this comes with added risk and past performance may or may not be sustained in the future.

4. Stability vs growth

• Nifty 50 Funds can be suitable for conservative investors who prefer relative stability and steady long term growth.
• Nifty Next 50 Funds may be suitable for aggressive investors who are willing to take higher risks for the possibility of greater returns.

5. Liquidity and market influence

• Nifty 50 stocks are highly liquid, meaning they are easy to buy and sell without affecting the stock price too much.
• Nifty Next 50 stocks may have slightly lower liquidity compared to Nifty 50 stocks, meaning large-scale buying or selling can have a bigger impact on their prices.

6. Expense ratio

• Since both are passive funds, their expense ratios are low compared to actively managed funds.
• However, Nifty Next 50 Index Funds may have slightly higher expense ratios than Nifty 50 Index Funds

Which one should you choose?

Choose Nifty 50 Index Funds if:

• You prefer relative stability and lower risk.
• You are investing for the long term with moderate returns.
• You want exposure to India's largest and most stable companies.

Choose Nifty Next 50 Index Funds if:

• You can handle higher risk in exchange for potentially higher returns.
• You are looking for long term growth-oriented investments.
• You believe in investing in the future leaders of the stock market.

Can you invest in both?

Yes, many investors choose to invest in both Nifty 50 and Nifty Next 50 to balance their portfolios. A mix of both can offer a good combination of relative stability and long term growth. If you are new to investing, you can start with Nifty 50 Index Funds and gradually add Nifty Next 50 Index Funds as you gain confidence.

Conclusion

Both Nifty 50 Index Funds and Nifty Next 50 Index Funds offer investing opportunities for investors, but the choice depends on your risk tolerance and financial goals. If you want steady and reliable returns, Nifty 50 Index Funds can be suitable option. If you are willing to take on some risk for higher potential rewards, Nifty Next 50 Index Funds may be a relatively better choice. Ultimately, a diversified portfolio that includes both can help you benefit from both.

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.