The Nifty 50 may contain some of India’s most prominent listed companies, but the large company universe does not end there. The Nifty Next 50 represents another set of 50 companies within the Nifty 100.

Nifty Next 50 funds are passive mutual fund schemes that aim to track the performance of this index. Instead of a fund manager independently choosing  which stocks to buy or sell, the portfolio is built around the companies and weights represented in the Nifty Next 50.

The index consists of the 50 companies in the Nifty 100  after excluding the Nifty 50 constituents. Together, the Nifty 50 and Nifty Next 50 therefore form the Nifty 100 universe.

The Nifty Next 50 follows a free float market capitalisation weighted methodology. This means the 50 companies do not have identical weights in the index. A company with a higher free float market capitalisation can have a greater influence on the index of the movement.

You can consider Nifty Next 50 funds if you are:

• Looking for exposure beyond the Nifty 50: The fund gives you access to another set of companies within the Nifty 100. This can be relevant if your existing portfolio is largely centred on Nifty 50 companies and you want to explore a different part of the large company universe.
• Comfortable with a passive investment approach: The portfolio follows an established index methodology rather than relying on a fund manager to decide which companies are likely to outperform.
• Investing towards a goal that allows for market fluctuations: These are equity investments, so their value can move in either direction. Consider whether you have enough time before your financial goal to remain invested through periods when the underlying stocks are performing poorly.
• Clear about what the fund adds to your portfolio: Before investing, look at your existing mutual fund holdings. If other schemes already have substantial exposure to Nifty Next 50 companies, adding another fund may increase overlap rather than introduce as much new exposure as you expect.

When you invest in a Nifty Next 50 fund, your money is pooled with investments made by other investors. The scheme then maintains a portfolio designed to follow the Nifty Next 50 index.

Suppose you invest Rs. 50,000 in a Nifty Next 50 fund.

If the value of your investment subsequently rises by 9%:

Rs. 50,000 + (Rs. 50,000 x 9%) = Rs. 54,500

If the value instead falls by 9%:

Rs. 50,000 - (Rs. 50,000 x 9%) = Rs. 45,500

This percentage movement is only being used to show how a change in fund value affects your investment. It is not an expected or guaranteed return.

A passive fund may also not deliver exactly the same return as its benchmark. Expenses and the practical process of maintaining the portfolio can create a difference between the returns of the funds and the index.

Understanding the underlying index is important because it determines what a Nifty Next 50 fund ultimately holds.

The starting point is the Nifty 100, which represents the top 100 companies based on full market capitalisation from the Nifty 500. The Nifty Next 50 represents the 50 companies remaining in the Nifty 100 after the Nifty 50 constituents are excluded.

The index is reconstituted semi-annually, with scheduled changes becoming effective on the last working day of March and September.

When the benchmark changes, a fund tracking it adjusts its portfolio to remain aligned with the revised index.

Here is what Nifty Next 50 funds can offer:

• Access to companies outside the Nifty 50: One investment gives you exposure to 50 companies that are part of the Nifty 100 but are not represented in the Nifty 50.
• No need to build the basket yourself: You do not have to individually purchase and maintain all the constituent stocks. The fund creates the portfolio around its underlying benchmark.
• A defined framework for stock selection: Companies are included according to the methodology of the index rather than discretionary stock calls made by a fund manager.
• A benchmark you can follow: Since the fund has an identified underlying index, you have a reference point against which its performance and tracking can be assessed.

The presence of these companies within the Nifty 100 does not remove the risks associated with equity investing:

• Market movements can reduce your investment value: When stocks represented in the index decline, a Nifty Next 50 fund can fall with them. Passive management does not provide protection from a broader market downturn.
• Returns are not fixed: The fund’s performance depends on its underlying portfolio. There may be periods when your investment generates negative returns, and following an established index does not guarantee capital appreciation.
• The portfolio can change: Index reviews can result in companies entering or leaving the Nifty Next 50. The fund will consequently need to alter its holdings to continue following the benchmark
• Some companies can influence the index more than others: Since the index uses free float market capitalisation weighting, the portfolio is not equally divided among 50 companies. Stocks with larger weights can have a greater impact on index performance.

Here are a few points to consider:

• Link the investment to your actual timeline: Think about when you expect to need the money. A financial goal that is approaching soon gives you less room to deal with a period of weak equity market performance.
• Review the Riskometer: Mutual fund schemes disclose their risk through the Riskometer. Look at the scheme’s indicated risk level and consider whether it is appropriate for your circumstances. SEBI requirements provide for periodic evaluation and disclosure of the Riskometer.
• Look beyond a single type of exposure: Consider how the fund fits alongside the rest of your portfolio. Large and mid cap funds, for example, follow a different investment mandate by investing across both large cap and mid cap companies.
• Consider spreading investments over time: If it suits your investment plan, a SIP allows you to invest at regular intervals rather than committing the entire amount at one market level. However, a SIP does not eliminate the possibility of losses.

Despite both containing 50 stocks, the two indices represent different portfolios.

The two indices are designed as separate sets of companies within the broader Nifty 100 universe. While Nifty Next 50 funds track the companies outside the Nifty 50, Nifty 50 funds provide exposure to the 50 companies represented in the Nifty 50 index.

Neither index should automatically be treated as a better choice. The more relevant question is which exposure fits the role you want the investment to play in your portfolio.

There can be several schemes tracking the same benchmark. Instead of judging them only by recent returns, consider the following:

• Understand what you are paying: Compare the expense ratios of relevant schemes. Costs are charged at the scheme level and can influence the returns investors ultimately receive. 
• Look at the tracking difference: Compare the fund’s performance with the Nifty Next 50. Tracking differences can help you understand how closely the fund’s returns have followed those of its benchmark.
• Consider the investment structure: Nifty Next 50 exposure can be available through different passive structures. If you are comparing index funds, understand how the product works and how you would prefer to invest before making a decision.
• Put risk alongside performance: Look at the scheme’s Riskometer instead of evaluating the fund only on the basis of historical returns.
• Bring the decision back to your portfolio: When looking for the best Nifty Next 50 mutual funds, consider your investment horizon, existing holdings and financial objective. A fund that suits one portfolio may not necessarily serve the same purpose in another.

Once you have understood the benchmark and compared the available schemes, you can start investing through Millions:

• Download the Millions app from the Google Play Store or the iOS App Store.
• Enter a few details and complete the KYC process.
• Log in and search for Nifty Next 50 funds available on the platform. 
• Compare information such as the expense ratio, tracking details and Riskometer.
• Select the scheme that fits your investment requirements.
• Enter the amount you wish to invest and choose the available SIP or lump sum option.
• Review the details before completing the transaction.