Tracking the Nifty Next 50

The mutual fund industry has recently seen a mad rush of passive funds. Over the last year, the industry has seen the launch of 44 passive funds in ETF, index and FoF format. Joining the bandwagon are Navi Nifty Next 50 Index Fund and Axis Nifty Next 50 Index Fund. While this will be Navi's second passive launch, it will be Axis' fifth passive equity fund launch in the past one year.

These new index funds in the large-cap space will track the Nifty Next 50 TRI. The Nifty Next 50 index comprises 50 companies from broader large-cap based Nifty 100, ranked 51st to 100th by market cap. The Navi fund will close for subscription on January 15, and the Axis fund will close on January 21, 2022.

About the strategy
By tracking the Nifty Next 50 TRI, these funds will allow an investor to invest in companies that are potential candidates for inclusion into the Nifty 50 index, the most widely tracked Indian equity index and a barometer for the Indian capital markets.

Comparing the two indices allocation to top-5 and top-10 stocks, we see that the Nifty Next 50 index offers greater diversification among more stocks than the Nifty 50 index. In terms of sector diversification, the Nifty 50 Index seems to tilt towards Financial Services, IT and Oil & Gas. In contrast, the Nifty Next 50 gives more weightage to Consumer Goods, Metals, and Financial Services.

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

About the performance
To understand how the Nifty Next 50 stacks up over a longer investment with its more popular peer, the Nifty 50 TRI, we compared the 5-year rolling returns of indices (see 'Performance comparison'). We observe that the Nifty Next 50 TRI has mostly outperformed the Nifty 50 TRI over the last decade. However, the trend seems to have reversed since the second half of 2020 as the latter has been outperforming the Nifty Next 50 TRI. But these are historical trends, and one cannot extrapolate them to the future.

Currently, 15 more funds track the Nifty Next 50 TRI. Out of these, six are ETFs and nine are index funds, 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.

About the AMC
After acquiring the Essel Mutual Fund in April last year, Navi Mutual Fund launched its first Navi Nifty 50 Index Fund in July 2021. As on November 2021, Navi MF manages Rs 912 crore of AUM across debt, equity and hybrid funds. Of this, Rs 153 crore is of the Navi Nifty 50 Index Fund, and the rest is primarily the legacy of Essel Mutual Fund.

As for Axis Mutual Fund, the AMC manages assets worth over Rs 2.5 lakh crore across 55 schemes, making it the seventh-largest fund house. Of this, Rs 2.47 lakh crore is made up of the open-end funds.

When it comes to the passive line-up of the AMC, it is a far cry from the kind of money it manages in the active space. The fund house currently manages eight index funds/ETFs that collectively manage assets worth over Rs 1,800 crore. Of these, six are equity-oriented, managing about Rs 780 crore.

Most of these passive funds offered by the fund house are fairly new, so they don't have a pretty long track record. The fund where sufficient history is available - Axis Nifty ETF, the AMC has been doing a fair job, given its modest tracking error against that of other ETFs tracking the same index (Nifty 50 Index).