NFO review: HDFC Nifty Next 50 Index Fund

HDFC Mutual Fund has launched a new index fund in the large-cap space that will track the Nifty Next 50 TRI. The AMC has recently filed for launching nine more ETFs and two more index funds in the passive investing space.

About the strategy
As per the SID, the scheme will track the Nifty Next 50 TRI, subject to tracking errors with the aim of delivering the same returns as this index. This particular index comprises 50 companies from broader large-cap based Nifty 100 as shown in the chart titled "About Nifty Next 50 Index"

The allocation to top-5, top-10 and even top-20 stocks of Nifty 50 index is more than the Nifty Next 50 index. Even the higher allocation to the bottom-10 stocks of the Nifty Next 50 index indicates that it offers greater diversification among more stocks than the Nifty 50 index. In terms of sector diversification, the Nifty 50 Index seems to have a tilt towards Financial Services, IT and Oil & Gas whereas the Nifty Next 50 gives more weightage to Consumer Goods, Metals and also Financial Services.

It must be noted that both these indices are market-cap based and thus, both these allocations would undergo a change as the market cap of its constituent companies change, whenever they undergo re-balancing, i.e., about twice a year.

About the performance
Since it is an equity fund in the large-cap space, we compared the five-year rolling returns of both these indices so as to understand how both of these stack up over a longer investment horizon. We see that the Nifty Next 50 TRI has beaten its relatively larger market-cap-based Nifty 50 TRI for most of the part over the last decade. But this trend seems to have reversed since the second half of 2020, wherein the latter has been outperforming the Nifty Next 50 TRI. It is worth noting that these are historical trends and cannot be extrapolated into the future.

There are 14 more funds that track the Nifty Next 50 TRI. Out of these, six are index funds and eight are ETFs, the oldest of which is Nippon India ETF Junior BeES that has been in existence since February 2003 and has the largest asset under management. Two index funds, by Kotak Mutual Fund and SBI Mutual Fund, have already been launched this year that track the same index.

About the AMC
As per the end of September 2021 disclosures, HDFC Mutual Fund ranks third in the industry, managing a total of Rs 4.39 lakh crore of investors' money. Of this, Rs 1.29 lakh crore is in 19 open-end equity funds.

The fund house has a basket of seven index funds/ETFs, with an AUM totaling over Rs 11,000 crore, making it the seventh-largest AMC in this space. Six of these funds track an equity-oriented index while one of them tracks the domestic gold price.

The expense ratio and tracking error are two competitive edges of HDFC Mutual Fund when it comes to managing passive funds based on equity indices. The AMC has done a decent job on both the parameters, being lower than the average of other funds tracking the same index.