NIFTY 50 INDEX AND NIFTY NEXT 50 INDEX
One of the most important indices of the National Stock exchange is the Nifty 50 index (N50) and Nifty Next 50 index (NN50). The eye of investors will be routed over these indices to understand the market condition.
N50 and NN 50 are the indicators in the share market, which indicates the entry and watchpoints.
Here we will be learning about the performance between two indices and their fundamental earnings.
In long run, say more than 20 years we will understand indices would be the best way of investments. Indices have shown a promising return.
The time period is between 1st Jan 2000 to 1stJan 2020. So, it covers 20 years, in which N50 provides 10.59% Y-O-Y and NN50 assures almost 9.5% Y-O-Y
Nifty 50 is the index that holds the top 50 companies in India. The companies are listed on the basis of market capitalization.
The recent company which listed is HDFC life Insurance replacing Vedanta groups.
Nifty Next 50 is the index that holds the top 51-100 companies in India.
Recently, SBI cards entered this index replacing HDFC life insurance.
These two indices are dealing with the top and well-established companies. Investing in the index will make a well-diversified and have low risk compared to other equity investments. Might be shares or mutual funds.
In recent years, investors have shifted their focus on investing over indices by ETF and Index fund.
Over the 10 years of performance despite of any crashes or corrections, indices perform better than many actively managed funds.
The index’s risk is lesser compared with a nominal return for the goal-based investments.
When we have both these indices in our portfolio, the return can be 10-12% per annum.
The valuation is basically the calculation to understand the condition of the price. Whether the market price is highly valued or the perfect value to invest.
In this section, we are going to look on the Nifty 50 and Nifty next 50’s P/B and P/E ratios only.
NIFTY 50 Index:
Current valuation: P/E – 31.09; P/B – 3.15
YTD (2020) Average Value: P/E – 25.06; P/B – 3.0
March& April Month Value: P/E – 20.92; P/B – 2.5 (COVID-19 crash)
NIFTY NEXT 50 Index:
Current Valuation: P/E – 70: P/B – 3.87
YTD (2020) Average value: P/E – 65; P/B – 3.5
March & April Month Value: P/E – 54; P/B – 2.7
N50 has its high value when the P/E reaches more than 20. NN50 high-value range of P/E will be around 55.
When the market moves more than these P/E, the market will be ready for a correction or recession. If not, the market will be stagnant and the return will be less than bank returns.
An investor should watch on Nifty 50 P/E when it moves more than 23 times of earnings. We should keep quiet in the market and wait for the opportunity.
PERFORMANCE N50 vs NN50:
Here the comparison of the performance of two indices is established between 1st Jan 2010 to 1stJan 2020. For the 10 years, we would be understanding the performance every year.
In which 5 years performance is dominated by N50 and five more years is dominated by NN50.
From the graph, we can understand that whenever there is a fall or depression in the market, N50 performance ahead of NN50 and vice versa.
That is the reason, why we always suggest have both N50 and NN50 in your portfolio.
In the year 2015, strong performance has seen in both N50 and NN50 with 41% and 61% returns respectively.
Source: NSE Website
The next comparison is the year on year performance which comprise of 20, 15, 10, 5, 4, 3, 2, and 1-year performance.
This analysis of the year’s performance has made our mind that the index performs on an average of 10% return in a long time.
The maximum return over some particular time frame is 12%. So, an investor should fix their mind in such a way 12 percentage annual return is suitable.
In the last 4 years, a complete market is well dominated by N50. The main reason is P/E ratio was too high in NN50.
This was a clear indication of an overvalued market, in this situation, the return will be more stagnant. At this point, investors can wait and watch the market by preserving the capital.
UNDERSTANDING N50 AND NN50:
As an investor, we should understand the data and the performance are before COVID crashes.
If we analyze the current market, the performance would be more worsen in nifty next 50 index more than of the Nifty 50 index.
Between the years 2015 – 2018, NN50 has shown huge growth and the market was a huge bubble. This is the reason, NN50 has shown to produce a negative return in the last 3 years.
So, investors should have an idea as the market will be performing to produce a 10% return every year for the last 20 years.
So, come off the mindset as mutual funds will produce 20% year on year return, be happy with the mindset of 10-12% return which is really fantastic in long run.
This is the return of Lumpsum invested 20 years back. If we invest periodically whenever the market falls and wait for another fall, the return would be more than 14% per annum.
It is difficult to time the market but can understand market behavior.
Have your investments in both N50 and NN50 as both can yield a return of 10-12% per year. You can invest in indices by Index fund and ETF.
· Nifty 50 and Nifty Next 50 should be in portfolios of every investor. As it promises a definite return in long run.
· The volatility and the risk involved is minimal in the main indices than in any other funds or stocks.
· Plan your investment goal on the return of the index. So, a 10% return every year is the ideal aim of return we should look for.
· It is not about investing in N50 or NN50, but in a long time, N50 has shown nearly 1% more return than NN50.