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Original Question: Which index fund would be better, Nifty 50, Nifty 100, or Nifty 500? What are the risks associated with them?
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Let me hold a contrarian opinion to the prevailing sentiment in the answers thread and say that for me NIFTY 500 is the preferred index to invest in. But it entirely depends on an individual’s risk profile.
NIFTY 50: Flagship Indian stock market index that represents the weighted average of the top 50 largest Indian companies listed on the National Stock Exchange (NSE).
NIFTY 100: Represents the weighted average of the top 100 largest Indian companies listed on the NSE. This index intends to measure the performance of large-cap companies.
NIFTY 500: It represents the top 500 Indian companies from the universe of around 2000 companies listed on the NSE. This index intends to measure the performance of the broader Indian market.
✓ Per NSE data, among 2000 companies listed on NSE, The NIFTY 50 Index represents about 66.8% of the free-float market capitalization vis-à-vis NIFTY 100 Index represents about 76.8% of the free-float market capitalization vis-à-vis NIFTY 500 Index represents about 96.1% of the free-float market capitalization.
✓ Per NSE data, the total traded value of NIFTY 50 index constituents for the last six months ending March 2019 is approximately 53.4% of the traded value of all stocks on the NSE vis-à-vis 66.2% for NIFTY 100 vis-à-vis 96.5% for NIFTY 500.
Source:
So let us ask ourselves which category of active funds do I feel comfortable investing in - Large Caps or Flexi Caps/ Multi Caps?
➢ If you are a risk-averse equity investor or traditionally invested in Large Cap Funds then NIFTY 50 or NIFTY 100 are good options for you in passive space.
➢ However, if you like to take a slight risk in want of generating a slightly better return, or wish to invest beyond Blue chips, in emerging companies where growth opportunities are higher or if you have traditionally invested into Flexi Caps/ Multi Funds, etc., then NIFTY 500 index fund is a better option in passive space.
§ Comparison of constituents: NIFTY 50 vs NIFTY 100 vs NIFTY 500
So grossly speaking, NIFTY500 is 75% identical to what NIFTY 50 is. If invested into NIFTY 500, the extra 25% exposure into Next 50, Midcap, and Smallcap companies which are absent in NIFTY50 could generate a slight extra return at the expense of slightly higher volatility during the holding period.
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👉 NOTE: We should not blindly equate volatility i.e. numeric std. deviation to Risk. NIFTY 500 is more diversified than NIFTY 50, hence less risky from a diversification point of view. But practically speaking, the risk is more or less similar for both.
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Similar tactics of adding some Mid-caps and Small-Caps in the portfolio are often used by fund houses while constructing portfolios of the Flexi-cap MFs vis-à-vis Large-cap MFs. To establish the analogy of investing in Large-cap Active MFs and Flexi-cap Active MFs, I would like to showcase the below table. Please notice the higher exposure in Mid-caps and Small-caps that the same fund house has taken in their Flexi-cap MFs in comparison with their Large-cap MFs presumably in hope of slightly better return. And indeed slightly better return expectations from Flexi-caps were met in most cases (with a few exceptions e.g. 15 Yr return for ABSL).
§ Comparison of Returns: NIFTY 50 vs NIFTY 500
Does it mean that NIFTY500 index funds will always outperform their peer of NIFTY50 index funds? Unfortunately, there is no such guarantee
o If we look at the last 5 years, during the period Jan/ Feb 2020, NIFTY 500 underperformed with respect to NIFTY50.
o In Jan 2018 and again in Jul 2021, NIFTY 500 beat the NIFTY 50/ 100 fair and square.
The stock market is all about market cycles, so if we do a point-in-time analysis for a short period of time (< 5 years), it is basically anybody’s game and it is impossible to predict which one will give a better return in short term. Generally during Bull Runs, the broader market will outperform hence NIFTY 500 will do better. And during the period of consolidations, NIFTY 50 will do better.
If we try to think of 15/ 20 years ahead in the future and somehow feel positive to foresee a few Bull Runs and if we are ready to stomach some interim volatility, it makes sense to invest in NIFTY 500. Just like most Flexi-cap funds, investing in NIFTY 500, is mostly investing in Large-cap stocks with a marginal exposure into Mid-cap stocks and Small-cap stocks in strict moderation.
The first and only NIFTY 500 index fund was launched by Motilal Oswal recently in Sep 2019. With less than two years of performance data available and in the middle of a bull run, there is NO point in comparing returns of say UTI Nifty Index Fund vs MOST Nifty 500 Index fund. As we all know by now, if we compare returns now, NIFTY 500 will do better simply because of the current Bull Market. We have to keep a close watch and compare the returns after at least a decade.
At the end of the day, index investing is nothing but investing into the future of the country’s economy (as we eliminate the selection risk of active funds). Many experts feel the fifty biggest companies are a really narrow universe to represent the vibrancy and churn in the Indian economy. A broad market-based index like NIFTY 500 is a much better and closer reflection.
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Footnotes