When we talk about investing in stock market the first term click’s in our mind what the heck is this Nifty 50 and why Indian stock market guys always keep using this term repeatedly.
Well, I got you hence today I got you a comprehensive guide on What is NIFTY 50, how it works, how to invest in NIFTY 50, and so much more.
So let’s get started!
Table of Contents
What is NIFTY 50?
NIFTY 50 or National Stock Exchange 50 represents the top 50 biggest companies of India from across all the sectors listed on the NSE (National Stock Exchange – the biggest stock exchange of India).
Nifty is the biggest and most actively traded index in the world.
This index serves as the benchmark for overall performance of Indian Stock Market.
Why NIFTY 50 is Important?
NIFTY 50 is the most important index in India introduced back in 3 November 1995.
In simple terms, if you wanted to know the health of Indian economy then you have to check how the NIFTY 50 index is performing, if it is falling then the condition of Indian economy is weak or if it is increasing then that means our Indian economy and our GDP is increasing.
Why?
The reason behind this is that as NIFTY 50 comprises of the biggest 50 companies or the blue chip of blue chip companies of India that contribute the most in our Indian GDP hence, if it falls then that is the sign that the big 50 companies of India are struggling to do their business and to grow it.
Hence, the NIFTY 50 growth is directly proportional to the growth of these big 50 companies of India.
How NIFTY 50 Stocks Are Selected?
NIFTY stock selection or reconstitution happens every six month on basis of and to become the part of NIFTY 50 composition the companies need to full fill these three criteria’s:-
- The companies should need to be listed on NSE Stock Exchange.
- The companies are selected on the basis of their free float market capitalisation, higher the free float market capitalisation will higher the weightage they will be given in NIFTY 50 composition
- Lastly, the company stocks need to be highly liquid consistently and their performance in terms of business and market cap should also need to be keep growing else they will be thrown out from the list of NIFTY 50 companies.
Benefits of Investing In NIFTY 50
Investing in NIFTY 50 got many advantages:-
- Diversification – When you invest in NIFTY 50 that means you are investing in top 50 companies of India from across the sectors hence, you get a pretty got diversification that eventually result in lower the risk on your investment.
- Passive Investment – NIFTY 50 investing aims to replicate the returns of NIFTY, hence your money keeps growing passively till the time Indian economy is healthy and growing.
- Low Fees – In NIFTY 50 investing as you are just mirroring the NIFTY 50 stocks hence, the fees are always kept low.
- Mirror Returns – As per a research it is found that most large cap mutual funds who invest in blue chip companies are unable to beat the index consistently for 10-20 years, hence investing directly in NIFTY 50, you will get the assurance of mirroring the performance of the NIFTY.
- Ease of Investing – Analysing and picking the stocks are both time taking and it require lots of knowledge to compare on different parameters, while NIFTY 50 investing make this job easy for you.
How To Invest In NIFTY 50
To invest in NIFTY 50 there are 3 ways available to you:
NIFTY 50 Index Fund
A NIFTY 50 index fund is a passive mutual fund that aims to track the performance and stocks of the NIFTY 50 and mirroring its return instead of beating it as in case of mutual funds.n
They are passive managed by the fund managers hence, they have a lower fees then an actively managed mutual funds.
They are beneficial especially if you wanted to invest in actively managed large cap mutual funds because as per history rarely there is a blue chip mutual fund that has beaten the NIFTY 50 returns in long term consistently.
Thus, paying a fund manager an extra fees by investing in mutual fund is a bad idea, hence you can opt for NIFTY 50 index fund in such case.
How to Invest in NIFTY 50 Index Fund:
- Research Funds: Look for reputable index funds that track the Nifty 50. Examples include the SBI Nifty Index Fund or HDFC Nifty Index Fund.
- Open an Account: To invest in index funds, you need to open a mutual fund with any broker of your choice or through an investment platform like Groww or Zerodha.
- Choose Your Fund: From the list of index funds, choose the one that replicates the NIFTY 50 stocks in the same proportion like HDFC Index Fund Nifty 50 Plan Direct Growth.
- Invest: Finally, you can invest in the NIFTY 50 index fund either through a lump sum investing or by setting up a Systematic Investment Plan (SIP) for regular investments.
NIFTY 50 ETF
NIFTY 50 ETF are the exchange traded funds that are traded on stock exchanges in real time like the stocks and they aim to mirror the returns of NIFTY 50.
Being passively managed, the fees on NIFTY 50 ETF is start from as low as 0.01%, that ultimately results in high net returns in long term.
To understand how index fund are different from ETF, checkout our in dept guide on ETF vs Mutual Fund vs Index Fund.
How to Invest in NIFTY 50 ETF:
- Open a Demat Account: Before investing in NIFTY 50 ETF, you need to open a Demat account with any broker of your choice like Zerodha, Angelone or Upstox.
- Find ETF: Find the ETF that tracks the Nifty 50 index like the Nippon India ETF Nifty BeES (one of the biggest Nifty 50 ETF)
- Buy ETFs: You can invest in the Nifty 50 ETF just like you buy the stocks in your demat account during the stock market hours. Best part, you can buy and sell them in real time unlike the index fund where you have to wait for the end day NAV of the fund.
NIFTY 50 Derivatives
NIFTY 50 Derivatives are a contract such as future and options that derive their value based on NIFTY.
If NIFTY 50 increases, the value of future and options of NIFTY will also increase and vice versa.
Do remember derivatives are very risky and can cause complete loss of your capital. Hence, always take consultation from registered investment advisors or do complete research before investing in NIFTY 50 Futures and Options.
How to Invest in NIFTY 50 Derivatives:
- Open a Demat Account: Once, you open a demat account you should need to turn on derivatives trading on your account to start trading NIFTY 50 future and options.
- Contract Size: NIFTY 50 option has a contract of 25 units, that means you can’t buy the single unit – you have to purchase the complete contract.
- Trade: Buy or sell futures or options contracts based on your market expectations.
- Expiry Date: Unlike the index fund or ETF, derivatives have an expiry date after which that specific contract get’s expired and it’s value become 0, hence you have to sell these contracts before their expiry date.
Final Words – NIFTY 50 Investing
That’s all! Here is the complete guide about investing in NIFTY 50.
NIFTY 50 investing act a harness against the risk and loss you may face if you invest in stocks directly or through mutual fund.
With NIFTY, you get a wide exposure of the blue chip companies of Indian stock market.
But to get extra ordinary returns, you must try to diversify your investments too like investing in Small cap and Mid Cap mutual funds, debt funds, etc.
Disclaimer: The Honest American provides financial education, investing strategies, & stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.
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