In this article, we address the concerns of many readers who want to know if they should exit Nifty Next 50 index funds or ETFs because of the looming Adani crisis.
As of Jan 31st 2023, the Nifty Next 50 holds three Adani stocks.
- Adani Green Energy Ltd. 1.73%
- Adani Transmission Ltd. 2%
- Adani Total Gas Ltd. 2.35%
So that is a total of 6.08%. Nineteen stocks have a higher weight than Adani Total Gas. So just Adani stocks alone cannot control the returns of the index.
The index needs no help from Adani stocks to underperform. It has been doing that quite well on its for a while now! The 10-year rolling returns of Nifty Next 50 TRI and Nifty 50 TRI are shown below.
Please note that this is before expenses! After expenses, Nifty Next 50 has most likely underperformed over the last ten years or is just about hanging on to dear life. Now does that mean you should exit?
That depends on your expectations and the research you did before entering. If you look at the graph above, you can see that the extra gains of Nifty Next 50 have periodically evaporated. So the current phase of underperformance is nothing new for Nifty Next 50. It has done that before.
We cannot hope to beat the Nifty 50 without taking on risk, and that risk has implications. If you were unaware of those implications before, you probably should exit as many have – Investors lose interest in Nifty Next 50 index funds.
If you can appreciate this risk and are willing to wait it out, that is fine too. Either way, I don’t think investors need to exit Nifty Next 50 because of its Adani exposure. Still, if it affects your sleep, then do exit.
However, be warned that nothing good ever comes from an investor peeking into a mutual fund portfolio, especially a passive portfolio. There will always be some scandal or the other to hit index stocks. They will move out, move back in etc. We have no control over it.
When Nifty Next 50 is doing well, investors claim that the index has future large caps in it. When it is not doing well, investors claim it is a dump yard for discarded large cap stocks.
Unlike the Nifty 50, the Nifty Next 50 is almost an equal-weighted index. This cuts both ways. If it gains, it gains big or the other way around. Investors not ready for such a ride should exit, Adani crisis or no Adani crisis.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
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