What Are the Ways to Invest in the Nifty 50 Index?
The Nifty 50 index is one of India’s flagship market indices which ranks the top 50 companies in India by market capitalization across various sectors. It tracks the price changes of companies listed on the National Stock Exchange (NSE). You can use the Nifty 50 as a metric for gauging the performance of the entire stock market.
The diversification offered by Nifty 50 is immensely beneficial as it considerably reduces the risk associated with equity investing. Whenever we see that markets are up, it indicates that the weighted average performance of the top fifty companies listed on Nifty 50 was up compared to the previous day.
Let’s discuss the different ways you can invest in Nifty.
What Is Nifty 50?
Nifty 50 is a grouping that tracks the price movements of the top 50 companies listed on the National Stock Exchange (NSE). It was introduced to the trading community on April 21 1997. You can use it for benchmarking fund portfolios, index funds and index-oriented derivatives. As of September 2022, the Nifty index represents almost 62% of the free-floating market capitalisation of stocks registered under the National Stock Exchange.
The complete trading value of Nifty 50 is equivalent to almost 41% of the total trading value of NSE. Moreover, the total market capitalisation of the Nifty 50 index tracking performance of a diverse range of stocks is ₹ 14,841,567.87 crores as of November 28 2022.
As it is an index, you cannot invest in Nifty 50 directly like shares of a company. However, there are two ways of investing in the Nifty 50 index. One is through the derivatives segment, while the other is through mutual funds.
How to Invest in the Nifty 50 Index through Derivatives?
As we have discussed, there are two ways of putting your money in the Nifty 50 Index. First, let’s discuss how to invest in this index through the derivatives segment.
- Investing via Derivatives
Derivative contracts like futures and options use this index as the underlying asset. It implies that any changes in the price of derivative contracts are directly linked with the Nifty 50 index.
As this is an index, you shall not receive its delivery at the end of the expiration period of derivative contracts. Instead, these derivative contracts shall be settled in cash upon expiry.
- Investing in Nifty through Futures
Investing in futures contracts can be a great opportunity to earn profits depending on your market views and prevailing market sentiments. Let’s understand how you can trade in Nifty 50 index futures with the help of an example.
Suppose you have a bullish view of the market and expect a rise in the value of the Nifty index. The current trading value of this index is 18000 points in October 2022, and as per your analysis, it can go up to 20000 points by the end of November.
In this scenario, you can buy Nifty November futures at 18000 points. If the index rises to 20000 points as per your expectations, you can execute the contract and book profits.
Now consider that you have a bearish view of stock markets. As per your analysis, the value of the Nifty index by the end of November will fall to 14000 points. In this situation, you can opt for short-selling November futures contracts at 15000 points.
Moreover, if the index moves as per your expectations and declines to around 14000 points, you can square off the respective trading position and book profits.
- Investing in Nifty through Options
Like futures contracts, you can also use options contracts of the Nifty 50 index to earn profits by tracking the price movements. We will continue with the above example for discussing options trading in the Nifty index.
Let’s say the Nifty 50 is trading at 15000 points in October 2022. You are of a firm view that markets will rise in November and Nifty will rally to 16000 points by November end. In such a scenario, you can buy a call option of Nifty November with a strike price of 16000 points.
If markets move according to your expectations and Nifty trades at 16000 points, you can square off the position and earn profits. If that does not happen, you can refrain from executing the contracts and lose only the premium amount.
On the other hand, if you have a bearish view of markets and expect the Nifty index to fall below 15000 points by November end, you can buy Nifty 50 put options for November at a strike price below the current trading value. If markets move as per your expectations and experience a fall, you can execute the contracts to book profits.
How to Invest in Nifty 50 through Mutual Funds?
The other way to invest your money in the Nifty 50 index is by purchasing units of Nifty index mutual funds. Derivative segments like futures and options are risky as there is always a significant probability of losses.
Therefore, if you have a low-risk appetite and are looking for moderate returns, you can invest in index funds or Nifty-based Exchange Traded Funds (ETF). These funds track the performance of the Nifty index on a real-time basis. The investment portfolio of these funds is the same as stocks forming the Nifty 50 index.
Many consider this as an indirect way of investing in the Nifty index. Some of the benefits associated with index funds are that it offers great diversification and high return potential against low cost of investment. As your basket will contain securities from multiple sectors, it will provide a higher degree of financial security during times of financial crisis.
Frequently Asked Questions
What are the advantages of investing in Nifty index funds?
Some of the advantages you will see while investing in Nifty index mutual funds are the low total cost of investment including a low expense ratio. Moreover, it can be an ideal way of investment in the stock market for those who do not possess the required expertise.
What are the criteria for choosing Nifty 50 stocks?
Stock exchanges consider multiple factors such as Indian Domiciled, Market Cap, Liquidity, Listing History and Trading frequency for choosing the Nifty 50 stocks.
Which sector receives the highest weightage in the Nifty 50 index?
As of October 2022, the financial services sector has the highest weightage among all the industries, which stands at 37.04% . It is followed by IT, having a weightage of 14.11% and energy, with a weightage measuring 12.7%.
What is the expense ratio in index funds?
The expense ratio is the cost charged by fund houses to cover the operational or administrative expenses of mutual funds. Some of the expenses covered under this charge are fund manager’s fees, marketing costs, infrastructural and logistical costs.