27 Dec 2020

Nifty Next 50 returns — my ‘risk appreciation exercise’

It’s not hard to find historical annual returns of Nifty 50 (here’s a good one), but I couldn’t find a similar summary for Nifty Next 50. I care about the Next 50 index because Next 50 is the core component of Kuvera’s recommended portfolio, which I also invest in:

Nifty Next 50 is the base of our recommendation with 46% of our equity portfolio recommended to this index. Our diversification through Nifty index, one international fund and one focused fund significantly improve on the return and risk of Nifty Next 50.

Because the data wasn’t readily available, I ended up downloading the daily index data and calculating annual returns myself. 

Annual returns of Nifty 50 and Nifty Next 50 indices

While I was initially annoyed for having to do this myself, I think this was a good exercise. What Nifty Next 50 lost in 2000 and 2001, for example, it has recovered only by the end of 2004! I think creating this table was a good Risk Appreciation Exercise for me. I have a feeling I now have more understanding and respect for the risks involved in share market investing. 12 months ago, I would have simply repeated what I heard from others: if you stay invested in the share market for many years, you’ll be fine. Meaning, staying invested is the only risk mitigation you need.

But imagine investing a large sum in the Nifty Next 50 index by the end of 1999. Three preceding years — 1997, 1998, and 1999 — have given eye-popping returns. Novice investors may not think twice before investing if they see such numbers. The Next 50 index soared by 141% in 2003, and that still wasn’t enough to bring the index back to its 1999 level! Only by the end of 2004 did the index actually catch up. If you made a lump sum investment into Nifty Next 50 by the end of 1999 and wanted the money by the end of 2004, you made next to nothing from the share market. That’s still better than taking the money out before 2004 when you were clearly in the ‘capital loss’ territory.

It still might be possible that if you stay invested for 7 years, you’d end up making a good return. But looking at these scary scenarios help you appreciate the risk better and take risk mitigation strategies (such as having an asset allocation) more seriously.

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