Krishan Kumar Daga, Senior Fund Manager, HDFC AMC

The near all-time high levels of most equity indices is proving to be a concern for investors looking to enter the markets.

Oct 29, 2021 10:10 IST India Infoline News Service

In an interaction with Shweta Papriwal, Editor, indiainfoline.com, Mr. Krishan Kumar Daga, Senior Fund Manager,  HDFC Asset Management Company Limited (AMC) said NIFTY Next 50 Index has a well-diversified portfolio across sectors with top 5 sectors accounting for ~ 76% exposure against ~ 82% in NIFTY 50 Index. 

Indian equity markets are trading near all-time high, do you think this market momentum is sustainable going forward, should investors be investing at these levels?

The near all-time high levels of most equity indices is proving to be a concern for investors looking to enter the markets. However, the absolute levels of market indices do not determine whether the markets are expensive, cheap or fairly valued. As the markets have moved higher, we have also witnessed a healthy profit growth among companies, with NIFTY 50 basket posting a 17% growth in earnings in FY 21*. As on 30 Sept 2021, NIFTY 50 was trading near 21.4x FY23E price to earnings ratio. The market cap to GDP ratio (based on CY22 GDP) has now crossed 100%*. However, in view of the low interest rate environment and healthy earnings growth outlook, the valuations look reasonable.

Against this backdrop, in our opinion, while markets hold promise over the medium to long term, one should moderate the returns expectations in line with the expected growth in nominal GDP. We remain optimistic on the economy and equity markets over the medium to long term given the fall in Covid-19 cases and relaxations in restrictions, easy financial conditions and low cost of capital, comfortable external sector, supportive monetary and fiscal measures, improvement in corporate profitability, etc. Resurgence of spread of Covid-19, premature unwinding of fiscal and monetary stimulus, sharp increase in US yields, higher than expected NPAs, etc. are key risks in the near term.

*Source: Kotak Institutional Equities

What is the case for Nifty Next 50 index fund over the regular Nifty funds and are these index substitute to each other?

HDFC NIFTY Next 50 Index Fund offers exposure to diversified portfolio at sector/ stock level. The index has exposure to 14 broad sectors with 9 sectors having individual weight lesser than 10% each and the median stock weight of the index is ~ 1.80%. NIFTY Next 50 Index has favourable risk-reward ratio as compared to NIFTY 50 Index. NIFTY Next 50 has outperformed NIFTY 50 Index over the 19-year period ended September 30, 2021

However, the NIFTY Next 50 Index cannot be considered as a substitute to the NIFTY 50 Index as both the indices outperform each other at different market periods. Therefore to benefit from the investment in top 100 companies of India, a combination of these two indices may generate better risk adjusted returns over long term.

How has the index performed in past when compared with NIFTY 50 Index?

NIFTY Next 50 index has not just outperformed but achieved higher risk-adjusted returns as compared to the NIFTY 50 over long term as shown below.

Performance Journey of NIFTY Next 50 Vs NIFTY 50
























NIFTY Next 50 Index has favourable risk-reward ratio as compared to NIFTY 50 Index over long term horizon

Periods CAGR Returns Annualised Volatality   Return-Risk Ratio
Nifty 50 TRI Nifty Next 50 TRI Nifty 50 TRI Nifty Next 50 TRI Nifty 50 TRI Nifty Next 50 TRI
Since Inception 17.5% 21.4% 22.4% 24.3% 0.78 0.88
15 Year 12.5% 14.6% 22.1% 23.6% 0.57 0.62
10 Years 14.9% 17.1% 17.1% 18.0% 0.87 0.95
5 Years 16.8% 14.4% 18.2% 18.3% 0.93 0.79
3 Years 18.6% 16.9% 21.8% 20.2% 0.86 0.83
1 Year 58.5% 57.7% 15.4% 14.8% 3.81 3.89

Returns are CAGR. Annualised Volatility based on daily returns for the respective periods
Return Risk Ratio = Returns /Annualised Volatility. Since Inception is from Nov 08, 2002. Data of NIFTY Next 50 Index TRI is available from Nov 08, 2002

Source : www.niftyindices.com

These attributes of the NIFTY Next 50 index coupled with good historical outperformance both on a return and risk adjusted return basis along with a well-diversified portfolio and exposure to differentiated businesses makes it investment opportunity worth considering.

Beside the market cap differentiation, is there any uniqueness of NIFTY Next 50 Index?

NIFTY Next 50 Index has a well-diversified portfolio across sectors with top 5 sectors accounting for ~ 76% exposure against ~ 82% in NIFTY 50 Index. The index in all has exposure to 14 broad sectors with 9 sectors having individual weight lesser than 10% each. Further, the index offers exposure to unique and differentiated business within the large cap space, where the sectoral sub-constituents materially differ as compared to NIFTY 50.

For instance, within the financial services sector, the NIFTY Next 50 index offers exposure to subsectors like Asset Management company, Life and General Insurance company, NBFCs, etc. Another key sectoral variation is the exposure to banks, which is about 4.7% in NIFTY Next 50 as against 25.1% for NIFTY 50. At a stock level too, NIFTY Next 50 provides a diversified and well distributed portfolio with top 10 stocks contributing close to 33% exposure (as against 58.3% for NIFTY 50) with individual stock weights ranging between 4.0% to 2.8%.

Secondly Out of 75 stocks that were included in NIFTY 50 index during January 2002 – March 2021, about 51 stocks were from NIFTY Next 50 Index. Thus the Fund offers investors an opportunity to invest in basket of tomorrow’s potential NIFTY 50 Companies.

The above Data is as on Sept 30, 2021.
Source : www.niftyindices.com

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