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What is Nifty 50 and How It Works in Stock Market?

What is Nifty 50 and How It Works in Stock Market?
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The NIFTY 50 is a benchmark index of the National Stock Exchange of India and is often used as a representation of the Indian stock market. Investing in NIFTY 50 or NIFTY funds can be a lucrative option for investors looking to gain exposure to the Indian economy. 

However, it is important to understand the basics of the index, as well as the different investment options available, before investing in nifty index funds. In this blog, we will discuss how you can invest in NIFTY 50, multiple ways to invest in the NIFTY 50 and the factors you can consider before investing.

What is the Composition of NIFTY 50?

The NIFTY 50 index represents the performance of the top 50 companies listed on the National Stock Exchange (NSE) of India. The companies included in the index are chosen based on their market capitalization and liquidity, and they may represent various sectors of the economy such as financials, energy, healthcare, technology, and consumer goods. 

As of April 2023, the NIFTY 50 composition includes companies such as Reliance Industries, HDFC Bank, Infosys, Tata Consultancy Services, ICICI Bank, Housing Development Finance Corporation (HDFC), Hindustan Unilever Limited (HUL), Bharti Airtel, etc.

History of Nifty50

In the 1960s and 1970s, the term NIFTY 50 referred to the New York Stock Exchange’s top fifty highly favored large-cap stocks, considered premium blue-chip investments trading at premium valuations. Stocks like Coca-Cola, Xerox, and IBM exemplified these NIFTY 50 choices, representing unquestionable picks for investors. Subsequently, in 1996, the NIFTY 50 acquired a new significance with the introduction of the NIFTY 50 Index on the National Stock Exchange of India, establishing itself as a prominent fixture in the Indian stock market.

Top NIFTY 50 Index Funds

Let’s have a look at the 10 top NIFTY 50 index funds according to Nifty weightage.

Company Name Weigh (%)
Reliance Industries Ltd10.36%
HDFC Bank Ltd9.79%
Infosys Ltd7.66%
Housing Development Finance Corporation Ltd6.82%
ICICI Bank Ltd6.8%
Tata Consultancy Services Ltd4.85%
Kotak Mahindra Bank Ltd3.93%
Hindustan Unilever Ltd3.1%
ITC Ltd2.81%
Axis Bank Ltd2.8%
Total 59%

Note: The data on the top NIFTY 50 index funds in India in the list is from 2nd November, 2023.  However, for real-time updates on stock prices and market trends, visit the smallcase stocks collection today!

How is NIFTY 50 Calculated?

NIFTY 50 for share market is managed by the professionals at NSE Indices Limited, who have established an Index Advisory Committee and can provide their expert guidance on significant matters related to equity indices.

NIFTY 50 indices can be computed using a float-adjusted and market capitalization-weighted methodology. In this approach, the index level may reflect the cumulative market value of the stocks included in the index during a specific base period. For the NIFTY 50 index, this base period is November 3, 1995, with a base value of 1000 and a base capital of Rs. 2.06 trillion.

The formula for calculating the price index is as follows:

Index value = Current market value / (Base Market Capital * 1000)

How to Invest in NIFTY 50 for the Long Term?

To invest in NIFTY 50 for the long term, you can consider the following options:

  • Direct investment in NIFTY 50: You can directly invest in NIFTY 50 by purchasing the stocks of the 50 companies that make up the index in the proportion they are represented in the index. This can be done by opening a Demat account with a broker.
  • Indirect investment in NIFTY 50: You can invest indirectly in NIFTY 50 by investing in mutual funds or exchange-traded funds (ETFs) that track the NIFTY 50 index.
  • Choosing between Index Funds and Exchange Traded Funds (ETFs): Both index funds and ETFs can track the performance of the NIFTY 50 index. However, ETFs can be traded like stocks throughout the trading day, while index funds can only be bought and sold at the end of the trading day at the net asset value (NAV) price. You can choose between the two based on your investment goals and preferences.

How to Invest in NIFTY 50 Index Funds?

Here are the steps you need to follow to invest in NIFTY 50: 

  • Open a Demat Account: The first step to investing in NIFTY index fund is to open a Demat account, which is an electronic account that holds your shares and other securities. You can open a Demat account with a registered Depository Participant (DP) of the National Securities Depository Limited (NSDL) or Central Depository Services Limited (CDSL).
  • Choose a Broker: Once you have a Demat account, you will need to choose a broker who can execute your trades on the stock exchange. Look for a broker who offers low brokerage fees and has a good reputation.
  • Fund the Account: Before you can start trading, you will need to fund your Demat account. You can transfer money to your account through online banking or by depositing a cheque at the bank.
  • Place an order: Once your account is funded, you can place an order to buy NIFTY 50 shares. You can do this through your broker’s online trading platform or by calling your broker. Make sure to check the current price value of NIFTY 50 before placing your order, and you can even set a limit order if you want to buy shares at a specific price.

Multiple Ways to Invest in NIFTY 50

You can invest in stocks in NIFTY 50 in multiple ways. Some of them are as follows: 

Invest in NIFTY 50 via ETF

NIFTY 50 ETFs can be an easy way to invest in the NIFTY 50 index. You can buy and sell these ETFs just like any other stock on the stock exchange. They aim to replicate the performance of the NIFTY 50 index, providing investors with exposure to the entire index through a single security.

Invest via Index Funds

Another way to invest in the NIFTY 50 can be through index funds. Index funds are mutual funds that track the NIFTY 50 performance. NIFTY 50 index funds invest in the same 50 stocks as the NIFTY 50 index and aim to replicate its performance.

Invest via NIFTY Derivatives

You can also invest in the market NIFTY 50 through derivatives such as future and options. Derivatives can be defined as contracts that derive their value from an underlying asset, in this case, the NIFTY 50 index. However, investing in derivatives can be considered more complex and risky than investing in ETFs or index funds.

Rebalancing of NIFTY 50

The NIFTY 50 index is rebalanced twice a year, in March and September, to ensure that it accurately represents the performance of the Indian stock market. 

The rebalancing process involves removing companies that no longer meet the index criteria and adding new companies that meet the eligibility requirements. The criteria for inclusion in the NIFTY 50 index include market capitalization, liquidity, and trading frequency, among other factors.

Returns of Nifty 50

The returns of Nifty 50 represent the performance of India’s top 50 large-cap stocks listed on the National Stock Exchange (NSE). Let’s have a look at the past performance of Nifty 50.

Trailing Returns:

Period This FundCategory Avg
1 y8.26%8.33%
3 y 18.15%18.77%
5 y 14.72%13.95%
7 y13.06%12.27%
10 y12.98%12.66%
15 y16.19%
Since Inception12.24%12.07%

Rolling Returns:

PeriodFund MedianCategory Avg Median
Any 1 y12.8%11.6%
Any 3 y12.8%11.9%
Any 5 y12.8%11.6%
Any 7 y12.3%11.3%
Any 10 y13.1%11.4%

How to Invest in NIFTY 50 Index Fund SIP? 

To do SIP (Systematic Investment Plan) in NIFTY 50, you can follow these steps:

  • Open a Demat and Trading account with a broker that offers NIFTY 50 ETFs.
  • Choose the NIFTY 50 ETF you want to invest in.
  • Set up a SIP with your broker by providing details such as the investment amount, frequency, and duration.
  • Ensure that your trading account has sufficient funds to cover the SIP investments.
  • Your broker will execute the SIP automatically at the specified frequency. Then you will receive the units of the ETF in your Demat account.

How to Invest in SIP with smallcase?

If you want to invest in SIP via smallcase, follow these steps:

  • Choose a smallcase: First, select a smallcase that aligns with your investment goals and risk profile.
  • Choose the SIP Option: Once you have selected the smallcase, you may see the option to invest through a SIP on the smallcase page. Click on the “Invest via SIP” button.
  • Set the Amount and Frequency: You can set the amount you want to invest in each SIP and the frequency of your SIPs. You can also choose monthly or weekly SIPs, depending on your preference.
  • Choose the Start Date: Select the start date of your SIP investments.
  • Link Your Bank Account: Link your bank account and authorize the SIP mandate.
  • Review and Confirm: Review the details of your SIP investment and confirm the investment.

Once you have completed these steps, your SIP investments will be automatically processed as per the frequency you have selected. You can track the performance of your smallcase portfolio and SIP investments on the smallcase dashboard.

Factors to Consider Before Investing in NIFTY 50

Before you invest in NIFTY 50 companies, there are several factors that should be taken into consideration. Some of them are as follows:

  • Risk Tolerance: It is important to consider how much risk you are willing to take on. 50 nifty can be volatile and experience market fluctuations, so it is important to assess your risk tolerance before investing.
  • Investment Goals and Horizon: It is important to consider what you hope to achieve with your investment in NIFTY 50 and how long you are willing to stay invested. This can help you determine your investment strategy and the types of stocks of nifty 50, you may want to invest in.
  • Investment Amount: You may consider how much money you can afford to invest in NIFTY 50 stocks. Your investment amount can be the determining factor as to how much you can invest in each stock and how diversified your portfolio can be.
  • Cost and Fees: You may consider cost and fees associated with investing in about NIFTY 50 constituents. These may include brokerage fees, transaction fees, and expense ratios. Lower fees can help to maximize your returns over time.

Benefits Of Investing Via 50 NIFTY Index Funds

  • Small Investment Requirement: Due to pooling funds from multiple investors, mutual fund companies permit investing with a modest sum. You can initiate investment with as little as Rs. 500 per month via SIPs, becoming a fractional owner of all NIFTY 50 stocks.
  • Investment Versatility: The flexibility of nifty index funds can extend beyond modest initial investments through SIPs. You can adjust your investment amount at any time, increasing or decreasing it as desired, making the investment process exceptionally convenient.
  • Cost-Efficient Investment: NIFTY 50 index funds can replicate the NIFTY 50 index without the need for an active team of analysts. This may eliminate the expenses associated with tactical decisions, such as stock selection and trading, resulting in lower management fees for investors.
  • Automatic Rebalancing: When investing in a NIFTY 50 index fund, a fund manager can maintain the portfolio in precise alignment with the NIFTY 50 index. Any changes in stock weightage are managed by the fund manager, relieving you of the burden of rebalancing and maintaining the index’s proportions.
  • Unbiased Investment: NIFTY 50 index funds adhere to a rule-based, automated investment approach, removing human bias from the decision-making process. The fund manager may follow a predefined mandate for stock selection and allocation, making it a valuable addition to your investment portfolio.

Risks & Challenges of Investing in NIFTY 50

Investing in Nifty 50 comes with certain risks and challenges. Here is a list of associated challenges you can consider before making investment decisions.

  • Market Risk: Nifty 50’s performance can be tied to the overall stock market, so it might be susceptible to market fluctuations and economic downturns.
  • Sectoral Risk: The index represents various sectors; a downturn in one sector can impact the entire index.
  • Stock Specific Risk: Some Nifty 50 stocks may underperform, affecting the overall index performance.
  • Lack of Diversification: While diverse, Nifty 50 may not cover all sectors or emerging companies, limiting diversification.
  • Market Timing: Entering or exiting the market at the wrong time can lead to losses.

Tips for Investing in NIFTY 50

Investing in the NIFTY 50 can be a great way to gain exposure to the Indian equity market. Here are some tips to consider before you invest in NIFTY companies:

  • Diversify Your Portfolio: Investing in a single stock or sector can be risky. Consider diversifying your portfolio by investing in multiple sectors in NIFTY 50 to spread the risk.
  • Stick to a Long-Term Investment Plan: Nifty stocks can be long-term investments. You may stick to a long-term investment plan to gain the maximum benefit.
  • Monitor the Performance of Your Investments: Can monitor the performance of your investments regularly to identify any negative trends and make adjustments accordingly.
  • Avoid Emotional Decision-Making: Making investment decisions based on emotions can lead to poor investment choices. Avoid being influenced by short-term market fluctuations and stick to your investment strategy.

To Wrap It Up…

Invest in nifty index fund to participate in the growth potential of the Indian economy. By understanding the basics of the index, and considering important factors such as risk tolerance and investment goals, you can make informed decisions and achieve your long-term financial objectives. 

Moreover, if you want the index beating returns, you can check out smallcase. It is a modern investment product that provides you with ready-made diversified portfolios. You can invest in these portfolios with just a few clicks. So, what are you waiting for? Check out the smallcase app today and speed up your investment journey. 

FAQs

1. How to invest in Nifty 50 ETF?

To invest in a Nifty 50 ETF, you can follow these steps:
1. Open a Demat and trading account with a broker that offers Nifty 50 ETFs.
2. Choose the Nifty 50 ETF you want to invest in.
3. Place a buy order for the ETF through your broker.
4. Once the order is executed, the ETF units will be credited to your Demat account.

2. Can I invest in Nifty 50? 

Yes, you can invest in Nifty 50. There are two ways to do this:  directly invest in Nifty 50 by buying the stocks of the 50 companies or indirectly invest in Nifty 50 by investing in mutual funds or exchange-traded funds (ETFs). 

3. How to invest in Nifty 50 directly?

To invest in Nifty 50 directly, you can follow these steps:
1. Open a Demat and trading account with a broker.
2. Research the 50 companies that make up the Nifty 50 index and decide which ones you want to invest in.
3. Calculate the weight of each stock in the index and buy the stocks in the same proportion.
4. Monitor the performance of your portfolio and make adjustments as needed.

4.  Is there a minimum amount to invest in Nifty?

There is no minimum amount to invest in Nifty 50 ETFs. You can start investing with as little as Rs. 500 through a SIP. However, there may be a minimum investment amount for direct investment in Nifty 50 stocks, depending on your broker.

5.  How to trade Nifty 50? Is it possible?

Yes, it is possible to trade Nifty 50 futures and options contracts. This can be more complex than investing in Nifty 50 stocks or ETFs. However, it’s important to do your own research and/or consult a financial advisor before investing.

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