For the past few years, the large-cap indices or broad-based indices have been the litmus test in the finance market to measure the performance of portfolios of mutual fund investments. The three large-cap indices that frequently make their presence in the financial news are NIFTY 50, NIFTY Next 50 and NIFTY 100. Let us look into each of these indices in detail and the difference in their weightage, risks, and returns to make informed investment decisions.

What are NIFTY 100, NIFTY 50, and NIFTY Next 50?

We all know NIFTY  is the stock market index of the National Stock Exchange(NSE). So, what are NIFTY 100, NIFTY 50 and NIFTY Next 50?

NIFTY 50: It represents 50 companies selected from the universe of NIFTY 100, based on free-float market capitalization* and liquid companies having an average impact cost* of 0.50% or less for 90% of the observations for a basket size of Rs 10 crore. The constituents should have derivative contracts available on NSE.

*Free-float market capitalization: In the free-float market capitalization method, the company’s value is determined only by the publicly held shares( excluding shares held by the promoters). The excluded shares are the free float shares. For example, if a company has issued 10 lakh shares of face value Rs 50, but the promoter owns four lakh shares, the free-float market capitalization is Rs 3 crore.

*Impact cost: Impact cost represents the cost of executing a transaction of a given stock, for a specific predefined order size, at any given point of time.

NIFTY 100: NIFTY 100 is a diversified stock index of the top 100 companies(based on total market capitalization from NIFTY 500), representing the major sectors of the economy. This index intends to measure the performance of large market capitalization companies. The NIFTY 100 tracks the behaviour of a combined portfolio of two indices viz. NIFTY 50 and NIFTY Next 50.

NIFTY Next 50: Previously called the NIFTY Junior index. It is the index of the remaining 50 companies(excluding the companies of NIFTY 50) from NIFTY 100. The cumulative weight of non F&O stocks in the index is capped at 15% on quarterly rebalance dates. Further, non F&O stocks in the index are individually limited at 4.5% on quarterly rebalance dates.

Sectoral Representation and Weightage

NIFTY 100

   

                       Sector

Weight(%)

NIFTY 100 NIFTY 50 NIFTY NEXT 50
1  FINANCIAL SERVICES 35.65 38.23 20.10
2  IT 14.65 16.72 2.48
3 CONSUMER GOODS 11.38 10.54 16.98
4 OIL & GAS 11.28 12.35 5.18
5 AUTOMOBILE 4.50 5.06 1.18
6 METALS 4.46 3.53 10.51
7 PHARMA 3.98 3.31 8.00
8 CEMENT & CEMENT PRODUCTS 2.70 2.51 4.04
9 CONSTRUCTION 2.66 2.78 2.01
10 POWER 2.48 1.65 5.76
11 TELECOM 2.05 2.11 1.79
12 CONSUMER SERVICES 1.61 0 10.31
13 SERVICES 0.80 0.66 1.71
14 FERTILISERS & PESTICIDES 0.72 0.53 1.97
15 HEALTHCARE SERVICES  0.48 0 3.50
16 CHEMICALS 0.39 0 2.88
17 INDUSTRIAL MANUFACTURING 0.22 0 1.59
Data as of 29 October 2021

One can make the following inferences looking at the table above:

● Different sectors are given different weights in each of the indices.

● NIFTY 100 and NIFTY 50 tilt heavily towards Financial Services, IT, Consumer Goods, and Oil & Gas. However, NIFTY Next covers diverse sectors like Consumer Services, Pharmaceuticals, Metals, Financial Services, and Consumer Goods.

● The contribution of the top 5 sectors in NIFTY 100,NIFTY 50 and NIFTY Next 50 are 77.46%, 82.9% and 65.9% respectively. It means that NIFTY Next is more diverse than NIFTY 100 and NIFTY 50 where most stocks are concentrated only in a few sectors.

Risk and Returns

The corresponding index returns for NIFTY 100, NIFTY 50 and NIFTY Next 50 are as follows:

 

Rolling Returns

Index Return(%) 1 year

(absolute)

3 years

(average)

5 years (average)
NIFTY 100 53.83 10.5 12.3
NIFTY 50 53.54 10.9 12.9
NIFTY Next 54.81 13.3 15.5

As one can see, NIFTY Next has outperformed NIFTY 100 and NIFTY 50, which are close in terms of returns. The condition is due to the following factors.

● The companies in the NIFTY Next 50 have performed to make to NIFTY 50 eventually. These are often the ‘Future Blue Chip Companies’ with higher growth potential.

● NIFTY Next 50 represents diversified sectors with stocks evenly distributed compared to the other two indices.

However, the risks associated with each of the indices differ.

Let’s look at the volatility of the indexes since inception.

Standard Deviation is the statistical measure of volatility which measures the spread of returns from the average price.

Index Standard Deviation
 NIFTY 100 22.33
NIFTY 50 23.66
NIFTY Next 26.51

NIFTY Next is highly volatile than NIFTY 100 and NIFTY 50.

It is because,

● NIFTY Next 50 acts as a catchment space for stocks growing into the top 50 large-cap categories from being mid-caps. Therefore, during market rallies, some scrips in the NIFTY Next 50 deliver outsized gains.

● NIFTY Next 50 index also holds stocks that drop out of the NIFTY 50 due to poor performance and fall substantially during market corrections.

Why invest in indices?

● One of the essential concepts of investment is diversifying your portfolio and minimizing the risk exposure. Investing in indices, whether index funds or trading in indices, is the most chosen strategy where you invest in a basket of scrips across diversified sectors averaging the risk exposure compared to the individual stocks during a market rally.

● As seen above, only the top stocks with large market capitalization are included in indices, and for the scrips to remain in the index, they must continuously perform. Investors can save their time from the tedious task of following up on individual stock performance by investing in indices.

If indices interest you, know more about the index funds here.

As we discussed the three indices – their compositions, sectoral representation and distribution, and performance in terms of risk and return, we hope you will find this comparison valuable and helpful to select the index that fits your portfolio. We also tried to throw light on the advantages of index funds, hoping that will help you expand your investment horizon with new products. Stay tuned to learn about more indices.