Nifty Next 50 poised for catch-up rally as valuations turn attractive – News Air Insight

Mumbai: Cost-conscious investors looking for value in the large-cap space can consider the Nifty Next 50 index fund-an index that invests in stocks ranked 51-100 by market capitalisation. Expectations of higher earnings growth than the Nifty 50, combined with the recent underperformance relative to the broader Nifty 50, offer value-seeking investors an entry point, according to wealth advisors and fund managers. Higher earnings growth, reasonable valuations and exposure to high-growth sectors make this index a good diversifier for long-term investors who prefer indexing.

“In their large-cap portfolio, investors could make a 60% allocation to Nifty Next 50 and the balance to the Nifty 50, given its underperformance and reasonable valuation,” says S Shankar, certified financial planner, Credo Capital. Shankar advises investors to maintain an overall 70% allocation to large-cap stocks within their equity portfolios.

The Nifty Next 50 has underperformed the Nifty 50 over the past year. It gained 0.44% compared with the Nifty 50’s gain of 7.4%. Over longer periods of 3-5 years, the Nifty Next 50 returned 18.4% and 21.2%, respectively, compared with the Nifty 50’s returns of 13.86% and 18.51%.

“Over the next two years, the Nifty Next 50 is expected to offer higher earnings growth than the Nifty 50,” says Sorbh Gupta, head of equities, Bajaj Finserv AMC.

In valuation terms, the Nifty Next 50 trades at a Price to Earnings (PE) Ratio of 20.66 times, lower than its five-year average PE of 26.01. It is also cheaper than the Nifty 50’s PE ratio of 22.64 and its five-year average of 24.13.

Mutual fund industry officials also recommend this index to diversify equity portfolios and reduce concentration risk. “Nifty Next 50 gives you exposure to 19 unique industries not covered in the Nifty 50. It has a lower concentration, with the top five stocks contributing 18.5% compared to 40% in the Nifty 50,” says Anand Varadarajan, chief business officer, Tata Mutual Fund. A report by Bajaj Finserv AMC notes that the Nifty Next 50 has served as a stepping stone, with 44 of its stocks making their way into the Nifty 50 over the past 15 years.

Unlike the Nifty 50, which is top-heavy with leaders such as HDFC Bank and Reliance having high weights of 12.78% and 8.53%, respectively, the highest weight of a company in the Nifty Next 50 is less than 3.81% – that of Hindustan Aeronautics. While the Nifty 50 has a 36.3% weight in financials and 9.91% in IT, the Nifty Next 50’s exposure is 20.17% and 2.26%, respectively.