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How to Invest in Nifty 50?

ICICI Securities 12 May 2022 0 COMMENT

Introduction

If you are an active stock market investor, you would have come across ‘Nifty 50’. Even if you watch the financial news often, you would have often seen this term flash across your screen. It’s one of the most important metrics to follow in the stock markets.

The Nifty 50 is one of two benchmark indices in India. It comprises the top 50 large-cap companies listed on the National Stock Exchange. It’s safe to say that the country’s largest and most reputed stocks cut to be part of this index.

When you invest in the Nifty 50, you invest in the top 50 companies in India. That allows you to generate and build a hefty corpus in the long run. For instance, in the 25 years since its launch, the Nifty 50 has grown almost 14 times (1,107 points in 1996 to 15K in Feb, 2021). That is enough reason to want to invest in this index. However, unlike equities, you cannot purchase an index directly. Investing in the Nifty 50 index requires other methods. Here’s how to do it.

Four ways to invest in the Nifty 50

1. Buy stocks in the same proportion as the index

The Nifty 50 comprises 50 different companies from 13 sectors in the country. One way to invest in the Nifty 50 index is to buy stocks in the exact proportion of the index. That means replicating the weights daily and rebalancing your portfolio. That can be a hectic, time-consuming and complicated process. That will also require considerable investment since you cannot buy shares in fractions and due to this exact weight of the stocks can’t be maintained.

2. Invest in index mutual funds

Investing in index mutual funds is one of the best ways to invest in the Nifty 50. Index funds are mutual fund schemes that replicate the index weightage exactly. The advantages of investing via index mutual funds are that it will require a lower capital outlay, be professionally managed, and not require you to monitor your portfolio constantly.

Additional read: What are index funds & how to invest in them?

3. Use the ETF route 

Exchange-traded funds are investment vehicles that replicate the features of mutual funds and stocks. They are like a mutual fund basket of stocks. Like shares, you can trade in them on exchanges. There are many Index ETFs that follows the Nifty50 and generates returns in line with it.

Additional read: What is Nifty BeEs? How to invest in it?

4. Invest via derivatives

The third way to get exposure to the Nifty 50 is through derivatives. You can invest in Nifty 50 futures and options that use the index as an underlying asset. However, derivatives do not give you physical delivery of the shares in the index. Instead, you will settle your contract in cash. Nevertheless, you will get exposure to the index through derivative contracts. The contract life is a maximum of up to 3 months and you need to settle the existing position and take a new position if you want to continue your exposure.

Which is the best route to invest in Nifty 50?

For retail investors with limited knowledge of the stock market, mutual funds and ETFs are the ideal route to pick for investment in Nifty 50.. If you are an advanced trader and have knowledge of derivatives, you can try your hand at Nifty futures and options. ndex-weighted investing in shares can be complex and seems difficult to execute.

Conclusion

The Nifty 50 represents the top 50 stocks in India listed on the National Stock Exchange. If you want to generate long-term wealth through index investing, you can choose to invest in the Nifty 50.

Sources

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