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One of our readers wanted to know whether it's better to invest in an index fund that tracks the Nifty 50 or the Nifty 500.
But before we provide our opinion, let's quickly understand the key differences between the two indices.
| Nifty 50 | Nifty 500 | |
|---|---|---|
| They are home to... | 50 most valued companies | 500 most valued companies |
| Where they invest | 50 large-cap companies | 100 large-caps + 150 mid caps + 250 small caps |
| Importance of top 10 companies | 55.87 per cent weightage | 32.51 per cent weightage |
| Why? | Top 10 has more weightage as there are just 50 companies | Has lower weightage as it is home to 500 companies |
| Name of the top 10 companies | HDFC Bank, Reliance, ICICI Bank, Infosys, ITC,TCS, L&T, Bharti Airtel, Axis Bank, SBI | Same |
| Number of sectors they invest in | 13 | 21 |
| Most overweight sector | Financial services (32.6 per cent weight) | Financial services (27.6 per cent weight) |
| Performance (10-year rolling returns) | 12.27 per cent* | 12.69 per cent* |
| NSE factsheet, as of August 30, 2024 | ||
*Performance
The headline numbers show the Nifty 500 to be marginally ahead, but there are three things you should know:
1.Nifty 500 TRI has a slight edge over Nifty 50, thanks to the amazing rally of mid and small caps after Covid. Given that the Nifty 50 is only home to large caps, they missed out on this bullish run.
For those curious, the large-cap index gave 19.77 per cent annualised returns from January 1, 2021, to September 16, 2024. In contrast, the mid-cap index grew 33.03 per cent, while small caps surged by 35.85 per cent during the same period.
2. Although the Nifty 500 has outperformed 70 per cent of the time in the last decade on a daily 10-year return basis, the long-term performance between the two is negligible. One of the reasons being that nearly 60 per cent of Nifty 500's portfolio is the same as Nifty 50's.
3. The Nifty 50 has performed marginally better during market slowdowns. Based on 10-year rolling returns, their lowest returns were 5.13 per cent, against Nifty 500's 5.05 per cent. Why? Since Nifty 50 is home to large caps only, they generally tend to fall relatively less than mid and small caps during any downturns.
What you should do
Given that the long-term performance of both indices is fairly similar, here's how to decide which one suits you:
Choose a Nifty 500 fund if
:
a) you want to look beyond the largest companies and seek some exposure to mid and small
b) you have an investment time horizon of at least seven years
c) you have a slightly high risk appetite, as mid and small-caps can have stronger short-term fluctuations
Invest in a Nifty 50 fund if
:
a) you are relatively more risk averse
b) you want to invest in top-tier, well established companies only
Also watch: How to use index funds in your portfolio
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