Nifty Next 50 poised for a catch-up race as valuations become attractive

Mumbai: Cost-conscious investors looking for value in the large-cap sector can consider the Nifty Next 50 index fund, an index that invests in stocks ranked between 51 and 100 in terms of market capitalization. Expectations of higher earnings growth than the Nifty 50, combined with the recent underperformance against the broader Nifty 50, provide an entry point for value-seeking investors, according to asset advisors and fund managers. Higher earnings growth, reasonable valuations and exposure to high-growth sectors make this index a good diversifier for long-term investors who prefer indexing. “In their large-cap portfolio, investors could invest 60% in the Nifty Next 50 and the rest in the Nifty 50, given its underperformance and reasonable valuation,” says S Shankar, certified financial planner at Credo Capital. Shankar advises investors to maintain a total allocation of 70% to large-cap stocks within their equity portfolios.

The Nifty Next 50 has underperformed the Nifty 50 over the past year. It gained 0.44% compared to the Nifty 50’s gain of 7.4%. Over longer periods of 3 to 5 years, the Nifty Next 50 returned 18.4% and 21.2% respectively, compared to the Nifty 50’s returns of 13.86% and 18.51%.

“Over the next two years, the Nifty Next 50 is expected to deliver higher earnings growth than the Nifty 50,” said Sorbh Gupta, head of equities at Bajaj Finserv AMC.

In valuation terms, the Nifty Next 50 is trading at a price-to-earnings (PE) ratio of 20.66 times, lower than its five-year average price-to-earnings ratio of 26.01. It is also cheaper than the Nifty 50’s price-to-earnings ratio of 22.64 and its five-year average of 24.13.

Mutual fund industry officials also recommend this index to diversify stock portfolios and reduce concentration risk. “Nifty Next 50 gives you exposure to 19 unique sectors not covered by the Nifty 50. It has a lower concentration, with the top five stocks contributing 18.5%, compared to 40% in the Nifty 50,” said Anand Varadarajan, chief business officer, Tata Mutual Fund. A report by Bajaj Finserv AMC notes that the Nifty Next 50 has served as a springboard, with 44 of its stocks finding their way into the Nifty 50 in the last fifteen years.

Unlike the Nifty 50, which is top-heavy and leaders like HDFC Bank and Reliance have high weights of 12.78% and 8.53% respectively, the highest weighting of a company in the Nifty Next 50 is less than 3.81%: that of Hindustan Aeronautics. While the Nifty 50 has a weightage of 36.3% in financials and 9.91% in IT, the Nifty Next 50’s exposure is 20.17% and 2.26% respectively.