Nifty Next 50: Can this be your next move in largecap investing

What next? We often ask ourselves this question as we move ahead in life - after passing an important academic exam, after getting promoted at work, or after achieving a health milestone. This is because we humans are wired to chase growth and progress and we look forward to our next challenge, the next opportunity, the next phase of growth in our personal or professional journey.

As equity investors, the ‘what next’ question currently applies to India’s economic prospects and to stock markets. India remains one of the fastest growing major economies and stock markets and in turn stock market investors have been direct beneficiaries in recent years. Within stock markets, small and mid-sized businesses have seen outsized returns compared to their larger peers. Going forward, economic momentum appears to be slowing down. Reasonable market valuations of the large cap sector could thus bode well for it. Also, amid the macroeconomic and geopolitical uncertainty, preference of global as well as domestic investors for stable large cap stocks over their more volatile and more vulnerable smaller peers could also support large caps.

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As large cap investors, stocks in the Nifty 50 index are the go-to for most equity investors. But once we have invested in the 50 largest Indian businesses as represented in the Nifty 50 Index, it is natural to ask ‘what next?’. The answer lies in the next 50 large Indian businesses. These are the up-and-coming business leaders with potential for growing market share and expanding profitability. These well-established businesses have proven business models and are well positioned to benefit from the emerging trends, evolving technologies and changing consumer preferences – offering investors both stability and headroom for growth. These businesses ranked 51st to 100th by market capitalization form part of the Nifty Next 50 Index and can be a good way to participate in the next leg of India’s economic growth. Investments in the Nifty Next 50 Index when added to an investor’s Nifty 50 investments, can complete their large cap investment bucket.

Investors can opt to invest in these large, high-potential businesses either actively or passively. Active investment could either be on a Do-It-Yourself basis or through the mutual fund route where a fund management team comprehensively researches these businesses and invests in them on the investor’s behalf. Here, exposure to the businesses will depend on their fundamental outlooks. Alternatively, one can opt for a passive investment approach through index funds or Exchange Traded Funds (ETFs) tracking the Nifty Next 50 Index. This offers a straightforward and cost-effective way to gain market-cap weighted exposure to these businesses.

A Nifty Next 50 ETF passively tracks the Nifty Next 50 Index by owning the constituent businesses in the same weights as the index. This offers in-built diversification with limited capital. The ETF’s returns closely mimic the Index’s returns, the minimal difference being a result of the fund’s operating expenses and tracking error.

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Investing in ETFs is akin to investing in shares as ETF units trade on the exchanges. Investors can tactically buy and sell units at real-time prices using a Demat account.

Additionally, the Nifty Next 50 Index and in turn Nifty Next 50 ETFs are also better positioned currently, in terms of sectoral exposure, as they have lower exposure to global facing and export-oriented sectors such as Information Technology which are sensitive to global growth, geopolitics and currency movements. This balances out the higher IT exposure in the Nifty 50 index, thus complementing an investor’s Nifty 50 investments.

(Author of the article - Chintan Haria is Principal- Investment Strategy at ICICI Prudential AMC)