Passive investing has caught investors attention in recent years especially amid the pandemic, as they offer ownership of a wide variety of stocks, broad diversification, relatively low risk (than actively manages schemes) and low costs. Some investors have switched to passively managed schemes such as Index Funds due to the underperformance of certain actively managed funds. The encouraging response from investors has led several fund houses to come up with many passive funds tracking different indices.

The idea of passive investing is now gaining momentum, especially in the large-cap segment. Index funds (and ETFs) are popular passive investment instruments that track a specified benchmark index to replicate the composition and generate similar returns.

However, note that this year i.e. 2022 due to headwinds or challenges in play, you need to tone down your return expectations. The Indian equity markets may witness intensified volatility in the near term due to the recent emergence of the Omicron variant with the rise in cases and the US Federal Reserve’s announcement of reduction of stimulus. This will increase risk towards the economic revival and influence the equity market performance.

Nevertheless, Navi Mutual Fund backed by Mr Sachin Bansal (Flipkart co-founder) has launched Navi Nifty Next 50 Index Fund. It is an open-ended scheme replicating /tracking Nifty Next 50 Index. The scheme will be investing in future market leaders that are part of the Nifty 100 after the Nifty 50 companies.

Table 1: Details of Navi Nifty Next 50 Index Fund

Type An open-ended scheme replicating /tracking Nifty Next 50 Index Category Index Fund
Investment Objective The investment objective of the Scheme is to invest in companies whose securities are included in Nifty Next 50 Index and to endeavour to achieve the returns of the index as closely as possible, though subject to tracking error. The objective is that the performance of the NAV of the Scheme should closely track the performance of the Nifty Next 50 Index over the same period subject to tracking error. However, there is no assurance that the investment objective of the Scheme will be realized.
Min. Investment Rs 500 and in multiples of Re 1/- thereafter. Additional Purchase Rs 100/- and in multiples of Re. 1 thereafter. Face Value Rs 10/- per unit
  • Direct
  • Regular
  • Growth
Entry Load Not Applicable Exit Load Nil
Fund Manager Mr Girish Raj Benchmark Index Nifty Next 50 Index TRI (Total Return Index)
Issue Opens January 01, 2022 Issue Closes January 15, 2022

(Source: Scheme Information Document

The investment strategy for Navi Nifty Next 50 Index Fund will be as follows:

Navi Nifty Next 50 Index Fund endeavours to invest in stocks in similar proportion to the stocks in the Nifty Next 50. Thus, the scheme will invest in Nifty Next 50 which are part of NIFTY100 and after excluding NIFTY50 stocks. These are nearly blue-chip stocks (beyond NIFTY50) that can provide better risk-adjusted returns in the medium to long term.

The investment objective of the scheme is to achieve a return equivalent to Nifty Next 50 Index by investing in stocks of companies comprising of the Nifty Next 50 Index.

The performance of the scheme may not be commensurate with the performance of the respective benchmark of the scheme on any given day or over any given period. Such variation is commonly referred to as tracking error. The scheme intends to maintain a low tracking error by actively managing the portfolio in line with the index.

The fund, in general, will invest a significant part of its corpus in equities; the surplus amount of the fund, not exceeding 5% shall be invested in Cash/Tri-Party Repo, Repo in corporate debt securities & Money Market instruments.

A small portion of the net assets will be held as cash or will be invested in debt and money market instruments permitted by SEBI/RBI including TREPS or in alternative investment for the TREPS as may be provided by the RBI, to meet the liquidity requirements under the scheme.

Under normal circumstances, the asset allocation will be as under:

Table 2: Asset Allocation for Navi Nifty Next 50 Index Fund

Instruments Indicative Allocation (% of net assets) Risk Profile
Minimum Maximum High/Medium/Low
Equities and equity-related securities covered by Nifty Next 50 Index 95 100 Medium to High
Debt & Money Market Instruments 0 5 Low to Medium

(Source: Scheme Information Document

About the benchmark

The Nifty Next 50 index represents the balance 50 companies from Nifty 100 after excluding the Nifty 50 companies. The NIFTY Next 50 is computed using the free-float market capitalization method, wherein the level of the index reflects the total free-float market value of all the stocks in the index relative to a particular base market capitalization value.

The NIFTY Next 50 has a well-diversified portfolio across sectors with less concentrated exposure to any one sector.

Here’s the top-10 stocks by weightage and sector representation of the Nifty Next 50 Index:

(Source: Nifty Next 50 Index Fact Sheet as of December 31, 2021

Who will manage Navi Nifty Next 50 Index Fund?

Mr Girish Raj will be the dedicated fund manager for this scheme.

Mr Girish Raj holds MMS and B.Sc. (Statistics) degree and has over 17 years of experience as an analyst in Portfolio Management Services and the Broking industry. Before joining Navi Mutual Fund, he has been associated as Senior Equity Analyst with Quest Investment Advisors (Quest), Equity Analyst with IFCI Financial Services Ltd. (IFIN), Pranav Securities Pvt. Ltd, and Independent Research Private Limited (IRPL).

At Navi Mutual Fund, Mr Raj currently manages Navi 3-in-1 Fund (Equity Portion), Navi Long Term Advantage Fund and Navi Nifty 50 Index Fund.

Fund Outlook – Navi Nifty Next 50 Index Fund

Navi Nifty Next 50 Index Fund is Navi Mutual Fund’s second index fund after Navi Nifty 50 Index Fund. Since Navi Nifty Next 50 Index Fund will aim to mirror the performance of the Nifty Next 50 Index — and the underlying index is composed of the next 50 largest companies by market capitalisation after the Nifty 50 companies — its fortune will be closely linked to how Nifty Next 50 Index performs. Some companies may eventually graduate and become a part of the Nifty 50 index.

The stocks comprising the underlying index are large-cap companies beyond the Nifty50, which may generate sustainable returns and are be potential leaders. The scheme offers investors diversification benefits by investing across sectors.

Navi Nifty Next 50 Index Fund offers investors access to the growth of potential market leaders by passively investing in securities of the underlying index. Moreover, it is expected to show relatively low volatility due to investment in the next large-caps after excluding the Nifty 50 companies. Being an Index fund, it reduces the risk of stock selection by the fund manager. All that Mr Raj has to do with this fund is simply replicate the constituents of the index in almost the same weights.

However, that does not take away the high market risk, due to the threat of the Omicron variant and the US Federal Reserve’s announcement of a reduction in stimulus. These factors among many others could have a bearing on the scheme’s performance. Therefore, if you are considering investing in Navi Nifty Next 50 Index Fund, ensure you hold a high-risk appetite, a long investment horizon and an investment objective that aligns with the fund.

This article first appeared on PersonalFN here

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