NFO review: Mirae Asset Nifty Next 50 ETF provides a low-cost way to invest in future largecaps

Nifty Next 50 index represents 50 companies from Nifty 100 after excluding the Nifty 50 companies. The stocks include SBI Life, HDFC Life, ICICI Lombard, Divi’s, Shree Cement, Dabur, Bandhan Bank

Kumar Shankar Roy Jan 13, 2020

Exchange Traded FundThe number of passive investment products that track Nifty Next 50 is growing. The latest one to throw its hat in the ring is Mirae Asset Mutual Fund, which has come up with a new NFO of Mirae Asset Nifty Next 50 ETF. This open-ended scheme will replicate Nifty Next 50 Total Return Index. The new fund offer opened on January 13 and will close on January 21. The scheme will re-open for continuous sale and re-purchase from January 27 onwards. Read on to know RupeeIQ’s assessment of this product.

Why Nifty Next 50

The Nifty Next 50 contains companies that are beyond the Nifty 50. At present, the index contains 50 stocks like SBI Life Insurance, HDFC Life Insurance, ICICI Lombard General Insurance, Divi’s Laboratories, Shree Cement, Dabur, Bandhan Bank, Pidilite Industries, Petronet LNG, HPCL, Shriram Transport Finance, Avenue Supermarts, Colgate-Palmolive, Marico, Lupin etc.

Effectively, the Nifty Next 50 index consists of smaller largecap companies. Such companies will one day become largecap/giantcap companies, as they increase their market value. Therefore, an investment scheme that replicates the Nifty Next 50 allows investors to participate in the wealth creation process as smaller largecap stock becomes larger. Since this is through the exchange traded fund (ETF) route, the entire process costs much less compared to an actively managed fund. An ETF aims to track an index. It does not take active stock calls, which reduces costs.

As per Mirae Asset MF, Nifty Next 50 has a more diversified portfolio than Nifty 50 at both stock and sector level. Also, Nifty Next 50 ETFs have outperformed 78% of largecap mutual funds in the last five years and seven years period. In the shorter-term, however, Nifty 50 seems to have done better than Nifty Next 50 in terms of CAGR.

Many argue that the popular Nifty 50 index is not an ideal portfolio. Plus, returns from Nifty 50 over longer periods like five years or 10 years are not anything to write home when you consider that fixed income products yield 8% per annum pre-tax. This is why there are many who feel the Nifty Next 50 is a better index considering the future potential. Take a look at the historical returns between Nifty 50 and Nifty Next 50 below.

nifty 50 vs nifty next 50

Why ETF route

Mirae Asset Nifty Next 50 ETF is an exchange-traded fund. It is a passively managed scheme, where the fund manager has no real role except for replicating the Nifty Next 50 Total Return Index (TRI).

Passive investment products score over the active ones on the following parameters:

* They eliminate fund manager risk.
* Generally they track broad-based indices thus reducing the impact of decline in value of any one stock or industry, sector.
* Since they are passively managed, costs are kept relatively low
* Fund managers change and funds close down frequently so passive funds suit an investor who is looking to invest for over 10 years or more.
* ETFs are generally cheaper than index funds. (Nifty Next 50 ETFs have expense ratio of 0.05 to 0.25 while Nifty Next 50 Index funds have expense ratio of 0.60 to 0.85)

That being said, ETFs as an investment route also have certain disadvantages.

* The advantage of purchasing an ETF diminishes when ETFs demonstrate low trading volumes. Low volumes lead to wide bid-ask spreads and thus reduce cost-effectiveness.
* To invest in an ETF, you must have a demat account. This requirement is not there for index funds etc.
* ETF trading means you need to go to the stock exchange on your own. You can only buy and sell from the fund-house (AMC) only when the amount involved is high, which is not the case for most retail investors.
* ETFs, like index funds, will have tracking difference. This means the ETF return will be lower than the actual index return.

Mirae Asset Nifty Next 50 ETF product

The minimum application amount during NFO is Rs 5,000. Investors can fill and submit the application at AMC branch offices, AMC Website, RTA offices, and channel partners.

Post NFO, you can buy/sell on NSE / BSE in any quantity or directly with AMC in multiples of 10,000 units.

Mirae Asset Nifty Next 50 ETF has no exit load.

Swarup Mohanty, CEO of Mirae Asset Investment Managers (India) Private Limited says: “We have seen huge polarisation in the market with 10 stocks contributing almost to the entire returns of the index in the last calendar year. Nifty Next 50 Index is a fairly diversified index which has sector and stock concentration significantly lower than the Nifty 50 Index, and gives investors the opportunity to participate in the potential returns of future bluechip companies”.

“In the last two years we have seen a huge divergence in the returns between Nifty 50 and Nifty Next 50 Index, which we believe should normalise and hence we believe this is a good time for investors to participate in the performance of Nifty Next 50 index. This fund launch is in line with our strategy of having low-cost ETF products along with few innovative ETFs that we plan to launch in the coming quarters,” he adds.

Do note that this is a new product and hence there is no return data to show how well Mirae Asset Nifty Next 50 ETF tracks Nifty Next 50 TRI.

Existing Nifty Next 50 products

At the moment, there are existing Nifty Next 50 ETFs in the form of ABSL Nifty Next 50 ETF, ICICI Prudential Nifty Next 50 ETF, SBI ETF Nifty Next 50, UTI Nifty Next 50 ETF etc.

The Nifty Next 50 index funds include DSP Nifty Next 50 Index Fund, ICICI Prudential Nifty Next 50 Index Fund, Motilal Oswal Nifty Next 50 Index Fund, UTI Nifty Next 50 Index Fund.

The 1 year return of most of the Nifty Next 50 MF products is between 3 to 4%. The two schemes with at least 3-year track record have given 9-10% CAGR in the 3 year period.

RupeeIQ take

ETF managers are supposed to keep their funds’ investment performance in line with the indexes they track. That mission is not easy. The gap between ETF return and index return is called tracking difference, a cost for investors. Indexes do not hold cash but ETFs do and so a certain amount of tracking difference in an ETF is expected. Good ETFs not only have low tracking difference but also have enough trading volumes so that investors can exit and enter through the stock exchange route smoothly.

Mirae Asset Nifty Next 50 ETF is a play on the index Nifty Next 50. If you only have Nifty 50 exposure already in your portfolio, you should aim to diversify the risks and also take exposure to Nifty Next 50 stocks.

Many actively managed largecap funds contain stocks from Nifty 50 and Nifty Next 50. So, you might want to check for overlap.

There are also products like ICICI Pru Nifty 100 ETF, LIC MF ETF – Nifty 100 and Nippon India ETF Nifty 100 which give the full exposure to Nifty 100 stocks (Nifty 50 + Nifty Next 50).

If you feel that Nifty 50 stocks will not do well in the future, there is a case for looking beyond Nifty 50. The Nifty Next 50 is a set of smaller largecap stocks that can seem worthy.

Do remember that not all stocks in the Nifty Next 50 will progress and enter Nifty 50. There will be some which make the cut and there will be some that won’t. So, an ETF tracking Nifty Next 50 provides you with an easy and low-cost way of capturing this migration of stocks from smaller largecap status to giantcap stature.

Disclaimer: Views expressed here in this article are for general information and reading purposes only. They do not constitute any guidelines or recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide/investment advice / intended to be an offer or solicitation for the purchase or sale of any financial instrument like ETFs mentioned in this article.


Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at kumarsroy@rupeeiq.com.

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