Invest Wisely: Nifty Etf Strategies For Beginners

Nifty 50 is an index of India's top 50 large-cap companies, representing a hypothetical portfolio that reflects the performance of the Indian stock market. Investing in Nifty 50 can be done directly by purchasing stocks of the constituent companies in proportion to their weightage in the index, or indirectly through mutual funds or exchange-traded funds (ETFs) that track the Nifty 50 index. ETFs are baskets of securities designed to mirror the composition of an underlying index, such as the Nifty 50. They offer low-cost exposure to the market and can be traded on stock exchanges like any other stock. Before investing, it's crucial to understand the basics of the index, the different investment options, and factors like risk tolerance and investment goals.

What is a Nifty ETF?

A Nifty ETF is an Exchange-Traded Fund that tracks the performance of the Nifty 50 Index, which is a benchmark index of the National Stock Exchange of India. The Nifty 50 Index is made up of the top 50 large-cap Indian companies across 13 sectors, selected based on their market capitalisation and liquidity. The Nifty ETF provides investors with exposure to these 50 stocks, which can be purchased just like any other stock on the stock exchange through a stockbroker.

The Nifty 50 Index is considered a barometer of the Indian stock market, representing a significant portion of the free-float market capitalisation of the stocks listed on the NSE. By investing in a Nifty ETF, investors can gain exposure to the Indian economy and benefit from the performance of the country's top companies.

Nifty ETFs are passively managed, meaning fund managers are not actively involved in investment decisions. This results in lower management fees and a lower expense ratio for investors. Nifty ETFs can be purchased through a broking and Demat account, and they are one of the cheapest equity funds available, with expense ratios ranging from 5 to 15 basis points.

When investing in a Nifty ETF, it is important to remember that the stocks in the Nifty 50 Index do not have equal weightages. Companies with a higher free-float market capitalisation are given higher weightages in the index. The Nifty 50 Index is rebalanced twice a year to ensure it accurately reflects the performance of the Indian stock market and includes emerging companies and sectors.

Overall, Nifty ETFs offer a convenient, low-cost, and diversified investment option for those looking to gain exposure to the Indian stock market and its top-performing companies.

How to buy a Nifty ETF

Nifty ETFs are a great way to gain exposure to the Indian stock market. Here is a step-by-step guide on how to buy a Nifty ETF:

Step 1: Understanding Nifty ETFs

Before investing, it is important to understand what a Nifty ETF is. Nifty ETFs, or Exchange-Traded Funds, are baskets of securities that track an underlying index, in this case, the Nifty 50 Index, which consists of the top 50 large-cap Indian companies across 13 sectors. By buying a Nifty ETF, you are essentially investing in the 50 stocks that form this index.

Step 2: Choosing a Broker

To buy a Nifty ETF, you will need to open a brokerage account with a stockbroker if you don't already have one. This broker will facilitate the purchase of the ETF units, which can be bought and sold like any other equity share on the stock exchange.

Step 3: Funding Your Account

Once you have chosen a broker, you will need to fund your brokerage account. You can typically do this through online banking or by depositing a cheque at the bank. Make sure to have sufficient funds in your account before placing any orders.

Step 4: Placing a Buy Order

After your account is funded, you can place a buy order for the Nifty ETF through your broker. You can do this via your broker's online trading platform or by contacting them directly. Remember to use a limit order when buying ETFs, as this will allow you to specify the price you are willing to pay for the ETF units.

Step 5: Receiving Your ETF Units

Once your buy order has been executed, the ETF units will be credited to your brokerage account. Congratulations! You now own a Nifty ETF and have exposure to the top 50 Indian companies.

Additional Considerations:

When investing in Nifty ETFs, it is important to keep the following in mind:

• Investment Objective: Nifty ETFs aim to replicate the performance of the Nifty 50 Index. They are suitable for investors seeking to match the market's performance and are often recommended for DIY investors or those with a long-term investment horizon.
• Tracking Error: This metric measures the difference between the returns generated by the Nifty ETF and the underlying benchmark index. A lower tracking error indicates a better performance by the ETF.
• Expense Ratio: The expense ratio is an annual fee charged by fund houses to cover expenses such as management fees and advertising costs. This fee directly impacts your net annual returns, so it is important to consider this when investing in Nifty ETFs.

Nifty ETF investment options

The Nifty 50 Index is a benchmark index of the National Stock Exchange of India, comprising the 50 largest Indian companies across 13 sectors. It is considered a barometer of the Indian stock market, capturing around 65-67% of the free-float market capitalisation of all stocks listed on the NSE.

Direct Investment in Nifty 50

One way to invest in the Nifty 50 is to buy the stocks of the 50 companies directly, in the same proportion as their representation in the index. This can be done by opening a Demat account with a broker. However, this option may be expensive and complicated, requiring a large sum of money to purchase all 50 stocks.

Indirect Investment in Nifty 50

There are two main indirect ways to invest in the Nifty 50:

• Mutual Funds or Exchange-Traded Funds (ETFs): These funds track the Nifty 50 Index and can be purchased through a broking and Demat account. ETFs can be traded like stocks throughout the day, while mutual funds can only be bought and sold at the end of the trading day at the net asset value (NAV) price.
• Nifty Derivatives: Another option is to invest in derivatives such as futures and options. However, this is considered a more complex and risky strategy than investing in ETFs or mutual funds.

Benefits of Investing in Nifty 50 ETFs

• Low Investment Amount: Pooling funds from multiple investors allows for smaller investment amounts, such as Rs. 500 per month through Systematic Investment Plans (SIPs).
• Investment Flexibility: Investors can adjust their investment amount at any time, increasing or decreasing it as desired.
• Low-Cost Investment: Nifty 50 ETFs replicate the index without the need for an active team of analysts, resulting in lower management fees.
• Automatic Rebalancing: Fund managers maintain the portfolio in line with the Nifty 50 Index, removing the need for investors to rebalance their portfolios manually.
• No Bias in Investing: Nifty 50 ETFs follow an automated, rule-based investment approach, removing human bias from decision-making.

Things to Consider Before Investing in Nifty 50 ETFs

• Investment Objective: Nifty 50 ETFs aim to match the market's performance, so they may not be suitable for investors seeking market-beating returns.
• Tracking Error: This metric indicates how well the ETF has tracked the underlying benchmark index, with lower tracking errors being preferable.
• Expense Ratio: The annual charge levied by fund houses can impact net annual returns, so it is essential to consider this factor before investing.

Popular Nifty 50 ETFs in India

• Mirae Asset Nifty 50 ETF
• Reliance Nifty 50 ETF

Benefits of Nifty ETFs

Nifty ETFs offer a wide range of benefits for investors, making them a popular choice for those looking to invest in India's top companies. Here are some of the key advantages:

Diversification

One of the most significant advantages of investing in Nifty ETFs is the level of diversification they offer. By tracking the Nifty 50 index, Nifty ETFs provide exposure to the 50 largest and most liquid stocks across multiple sectors of the Indian economy, including banking, finance, technology, and infrastructure. This diversification reduces the risk associated with investing in individual stocks, as investors are not dependent on the performance of a single company or industry. The Nifty 50 index represents around 65% to 66.8% of the total market capitalisation, allowing investors to tap into the collective strength of these industry leaders.

Low Costs

Nifty ETFs are known for their low expense ratios, making them a cost-effective investment option. The expense ratios for Nifty ETFs typically range between 5 and 15 basis points, which is significantly lower than that of mutual funds. This makes Nifty ETFs attractive to cost-conscious investors who want to maximise their returns while minimising fees. The low-cost nature of Nifty ETFs is due to their passive management structure, where they mirror the performance of the Nifty 50 index without requiring an active team of analysts.

Liquidity and Flexibility

Nifty ETFs offer high liquidity, as they can be bought and sold on the stock exchange during trading hours, just like individual stocks. This provides investors with flexibility and ease of trading, allowing them to enter or exit the investment at any time during the trading day. In contrast, traditional mutual funds can only be traded at the end of the trading day, limiting investors' ability to respond to market movements. The liquidity of Nifty ETFs also makes them suitable for investors who may need quick access to their funds.

Transparency

The portfolio of a Nifty ETF closely tracks the Nifty 50 index, which is publicly available and regularly updated. This transparency ensures that investors know exactly where their money is being invested. The holdings and allocation of assets in a Nifty ETF are available in the public domain, providing a clear understanding of the underlying investments. This transparency is a significant advantage for investors who want to make informed decisions and closely monitor their investment portfolio.

Long-Term Growth Potential

The Nifty 50 index has historically shown strong performance, and the Indian economy and its leading companies are expected to continue growing over time. This potential for long-term growth means that investing in a Nifty ETF offers the opportunity for capital appreciation. Additionally, some Nifty ETFs invest in dividend-paying stocks, providing a steady stream of income alongside potential capital gains. Therefore, Nifty ETFs are well-suited for investors with a long-term investment horizon who want to benefit from the growth of the Indian market.

Nifty ETF vs other funds

A Nifty ETF (Exchange-Traded Fund) is a basket of securities that tracks an underlying index. For example, a Nifty 50 ETF tracks the composition of the Nifty 50 Index, which is a benchmark index of the National Stock Exchange of India. When you buy a Nifty ETF, you are investing in the 50 biggest Indian stocks across 13 sectors.

Nifty ETFs offer extremely low-cost exposure to the market and have outperformed 90% of all large-cap mutual funds. The Nifty 50 index represents 66.8% of the free-float market capitalization of all the stocks listed on the NSE.

To invest in a Nifty ETF, you need a demat and trading account, and you buy and sell them like stocks. This means there are additional trading costs associated with Nifty ETFs, such as transaction charges, GST on transaction charges, SEBI charges, and stamp duty.

If you want to invest in the Nifty 50, there are two main alternatives to a Nifty ETF:

• Nifty Index Funds: These are mutual funds that track the Nifty 50 performance. They invest in the same 50 stocks as the Nifty 50 index and aim to replicate its performance. Index funds are bought and sold like any other mutual fund and do not require a demat account. They offer both growth and dividend options and are suitable for long-term investors.
• Nifty Derivatives: You can also invest in the Nifty 50 through derivatives such as futures and options. However, investing in derivatives is considered more complex and risky than investing in ETFs or index funds.

When comparing Nifty 50 ETFs and Nifty 50 Index Funds, it's important to consider the expense ratio, tracking error, purchase price of ETFs, and liquidity.

Expense Ratio

Nifty 50 ETFs have lower expense ratios than Nifty 50 Index Funds (average of 0.07% vs 0.22%.) However, there are additional trading costs associated with ETFs that can add up.

Tracking Error

Tracking error measures how well an index fund is able to replicate the underlying index. Nifty 50 ETFs have a lower tracking error on average, suggesting they do a better job of tracking the Nifty 50 index.

Purchase Price of ETFs

The price of ETFs can deviate from their Net Asset Value (NAV) due to supply and demand. This means you could end up paying more or less than what the ETF is actually worth.

Liquidity

Liquidity refers to how easy it is to buy or sell an ETF. Nifty 50 ETFs vary widely in terms of liquidity, so it's important to assess this before investing. Index funds, on the other hand, do not have liquidity issues as the fund house must honor buy and sell orders.

So, which is better: a Nifty ETF or another type of fund? The answer depends on your investor profile. If you are comfortable operating a demat and trading account and can assess ETFs for their price-NAV gap and liquidity, then a Nifty ETF may be a good choice as it can save you money and potentially offer better returns. However, if you prefer a simpler option, a Nifty Index Fund may be more suitable, especially if you plan to invest through a Systematic Investment Plan (SIP).

Frequently asked questions