Introduction
India has numerous stock indices to choose from to invest in and grow your money. Index mutual funds mirror indices to make returns for investors. Large cap index funds are among the most popular index funds to invest in because of their diversification, historical performance, and the top companies in the country.
Among all large-cap indices, the NIFTY 50, NIFTY 100 and NIFTY NEXT 50 are the ones worth knowing about.
Understanding the Three Indices
NIFTY 50
The NIFTY 50 is an Indian stock market index that consists of the weighted average of 50 of the country’s largest companies by market capitalisation on the National Stock Exchange. It is considered one of two benchmark indices in India – the other is the BSE SENSEX. It comprises companies from 14 different sectors.
The companies in NIFTY 50 are blue-chip companies with the highest market capitalisation in the country. For instance, Reliance Industries is the largest company by market capitalisation in India. It is a part of NIFTY 50.
NIFTY 100
As you may have already guessed, NIFTY 100 is a stock market index in India that comprises the weighted average of 100 of the largest companies in the country by market capitalisation. Again, the weightage of companies in this index depends upon their market capitalisation, just like the NIFTY 50.
Companies that are part of the NIFTY 50 naturally become a part of NIFTY 100 because they fall under the 100 largest companies in the country. Also, since more companies are in this index, it is much more diversified and covers 17 industries.
NIFTY NEXT 50
This Indian stock market index comprises the last 50 companies in the NIFTY 100 index, i.e. those that are not a part of the NIFTY 50 index. You can think of it as NIFTY 100 minus NIFTY 50. That’s why it is called the NIFTY NEXT 50. Like the other two large-cap indices discussed above, this index is also classified by market capitalisation. As the market cap of companies changes, their inclusion in the index will also change.
One thing to note here is that the NIFTY 50 and the NIFTY NEXT 50 are exclusive. Companies that appear on NIFTY 50 will not be a part of NIFTY NEXT 50. However, the companies in both these indices combined will make up NIFTY 100.
Is Investing in NIFTY 100 the Same as Investing in NIFTY 50 + NIFTY NEXT 50?
No. Investing in NIFTY 100 and investing in a combination of NIFTY 50 and NIFTY NEXT 50 is not the same. Let’s understand why.
So far, we have looked at how stock market indices are combined with their weighted average in the index depending on their market capitalisation. The weighted average of the top 50 companies in NIFTY 50 will not be the same as that of the companies in NIFTY 100. The same goes for NIFTY NEXT 50.
For instance, Reliance Industries’ weight in NIFTY 50 will be much higher than in NIFTY 100 because of the difference in the total market capitalisation. That is why investing the same amount of money in NIFTY 100 or split between NIFTY 50 and NIFTY NEXT 50 will not give you the same returns.
Which Index Should You Invest In?
The returns generated from NIFTY 50, NIFTY 100 and NIFTY NEXT 50 are different because of their respective composition. The risk and diversification of each of these indices are also vastly different.
The NIFTY 50 is an index of the 50 largest companies in India with exposure to 14 different sectors. If you want to invest in the best blue-chip companies in India, then this is the index to choose.
If you want to diversify your assets and cast your investments wider, you should choose NIFTY 100 to invest in. This will give you exposure to more sectors and double the number of companies as NIFTY 50. Your risks will be spread out wider.
NIFTY NEXT 50 is composed of some of the best companies in the country too. However, these are not the largest, but are the ones that don’t feature in NIFTY 50. This also means that they have the potential to be bumped up to NIFTY 50 if they grow. If you want to bet on growth stocks and take on some additional risk for possible gains, then invest in this index.
You can also invest in a combination of these indices for more diversification of risk and returns.
Conclusion
All investments that you make should be in line with your risk appetite and investment horizon. If you want to minimise risk, then choose NIFTY 50. For higher diversification, choose NIFTY 100 and for a slightly higher risk, you can choose NIFTY NEXT 50.
Disclaimer – ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. – ICICI Venture House, AppasahebMarathe Marg, Prabhadevi, Mumbai – 400 025, India, Tel No : 022 – 6807 7100. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.
