Ignored for long, the era of index mutual fund schemes seems to have begun in the country. After the regulatory changes in the mutual fund industry in 2018, return from index mutual funds is looking to be better than actively managed funds, especially over the short-to-medium term period.
DSP Mutual Fund is launching two different open ended index MF schemes – DSP Nifty 50 Index Fund and the other being DSP Nifty Next 50 Index Fund. For both of them, the NFO is scheduled to open on February 11 and close on February 15, 2019.
The benchmark for DSP Nifty 50 Index Fund will be the Nifty 50 Index and for the DSP Nifty Next 50 Index Fund, the Nifty Next 50 Index will be the benchmark. Both the indices operate in the large-cap space as defined by SEBI.
The performance of top 50 blue-chip companies listed at NSE is captured by the NIFTY 50 index. It therefore, represents the top large-cap companies in the country. The next 50 companies in order of free float market capitalization comes within the fold of NIFTY Next 50. They also represent potential candidates for inclusion in NIFTY 50 in future.
As far as diversification is concerned, NIFTY Next 50 has a well-diversified portfolio across sectors. About 71% exposure of the NIFTY Next 50 is in the top 5 sectors compared to 82% in the case of NIFTY 50. Further, in NIFTY Next 50, there are as many as 13 sectors that have individual sector weight lesser than 10% each. In the case of NIFTY50 there are 7 such sectors. This makes NIFTY Next 50 a well-diversified index strategy which may appeal to proponents of investment diversification .
As per NSE India website, NIFTY Next 50 index has historically outperformed NIFTY 50 index since its inception with a higher return to risk ratio for various longer periods. The year-wise relative performance, on the other hand, is more or less balanced.
Index funds are passive funds where there is no major role of the fund manager in the selection of stocks. On the other side of the prism is the actively managed fund, where the role of the fund manager is crucial in the fund’s performance. If at all an investor need the fund manager’s acumen to work in his or her favour, opting for mid-cap fund along with the index fund could prove adequate.
For the first time investors, it’s important to understand, what constitutes the two indices. One may stick with the DSP Nifty 50 Index Fund while only the highly aggressive and a relatively better-informed investor may consider investing in DSP Nifty Next 50 Index Fund. The investing horizon for both of these schemes should be at least seven years.