Invest In Nifty 50 Index Funds: A Beginner's Guide

The NIFTY 50 is an index of India's top 50 large-cap companies by market capitalization, listed on the National Stock Exchange (NSE). It is a benchmark for the Indian equity market and provides investors with a diverse portfolio and exposure to various sectors.

Investing in the NIFTY 50 can be done through two main routes: direct stock investment or indirect investment through index funds.

Direct stock investment involves researching and selecting individual companies from the NIFTY 50, opening a Demat account, and placing orders to buy the desired stocks in proportion to their weightage in the index.

Indirect investment can be done through index mutual funds or exchange-traded funds (ETFs) that track the NIFTY 50. This option offers lower costs, passive management, and professional management by fund managers.

Before investing, it is important to consider factors such as risk tolerance, investment horizon, diversification, and liquidity.

Direct stock investment: Research and select the companies you want to invest in, then open a Demat account and place your orders

To invest in the Nifty 50 index fund, you can opt for direct stock investment. Here's a step-by-step guide to help you with the process:

Research and Select Companies:

• To begin, you'll need to research the 50 companies that comprise the Nifty 50 index. These companies represent various sectors of the Indian economy, including financials, energy, healthcare, technology, and consumer goods. You can find the list of companies and their sector information online.
• Once you have the list, decide which companies you want to invest in. Consider factors such as their market capitalization and liquidity, as well as performance.

Open a Demat Account:

• The next step is to open a Demat account, which is a necessity for investing in the stock markets in India. A Demat account allows you to hold your shares and other securities in electronic form, making the process of buying, selling, and transacting much easier and faster than the traditional method of using physical receipts.
• To open a Demat account, you need to approach a Depository Participant (DP). DPs can be broking firms, banks, or agents of depositories. You can find a list of DPs on the websites of the two depositories in India: National Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL).
• Fill out an account opening form and submit the required documents, which typically include proof of identity, income, and address. Some common documents accepted include PAN card, Aadhaar card, voter ID card, passport, driving license, bank passbook, utility bills, etc.

Place Your Orders:

• After your Demat account is opened, you'll need to choose a broker who will execute your trades on the stock exchange. Look for a broker with low brokerage fees and a good reputation.
• Fund your Demat account through online banking or by depositing a cheque.
• Once your account is funded, you can place an order to buy shares of the companies you've selected. You can do this through your broker's online trading platform or by contacting them directly.
• Remember to check the current price of the shares before placing your order. You can also set a limit order if you want to buy shares at a specific price.

By following these steps, you can directly invest in the companies that make up the Nifty 50 index, giving you exposure to the Indian economy and potentially generating lucrative returns.

Invest through index mutual funds: Understand how index mutual funds work, choose a fund, decide on an investment amount, and monitor your investment

Index mutual funds are a type of investment fund that tracks the performance of a market index, such as the Nifty 50. They are a good option for investors who want to avoid high-risk bets but still seek exposure to equity. Index funds are passively managed, meaning they have lower fees than actively managed funds, and they are also well-diversified, reducing the risk of losing money.

Understand how index mutual funds work

Index funds are a type of mutual fund or exchange-traded fund (ETF) that tracks a specific market index. In the case of the Nifty 50 Index Fund, the fund invests in the top 50 Indian companies in terms of market capitalisation. The fund's performance aims to mirror that of the Indian stock market, so investors get exposure to the top companies in India.

Choose a fund

When choosing an index mutual fund, consider the following:

• Investment objective: Index funds aim to match the market's performance, so they may not be suitable if you are seeking market-beating returns.
• Tracking error: This is the difference between the fund's returns and the returns of the benchmark index. A lower tracking error means the fund is doing a better job of tracking the index.
• Expense ratio: This is the annual fee charged by the fund house, which covers expenses such as management fees and advertising costs. A lower expense ratio is preferable as it results in higher net returns for the investor.

Decide on an investment amount

Index funds usually allow investors to invest a lump sum or through a systematic investment plan (SIP). You can start investing in Nifty index funds with a small amount, such as Rs. 500 per month through a SIP.

Monitor your investment

While index funds are typically long-term investments, it is wise to review your portfolio periodically to ensure it aligns with your financial goals. You can also seek professional advice from a financial advisor, who can guide you in selecting funds and ensure your choices align with your goals.

Invest via derivatives: Trade in Nifty 50 stocks through derivative contracts such as futures and options

Nifty 50 derivative contracts, such as futures and options, use the index as an underlying asset. This means that the price movement of the derivatives is linked to that of the index. However, as the index is not a stock, it cannot be delivered on the expiry of its derivative contracts. Instead, all index derivatives are mandatorily cash-settled at the end of the expiry.

Investing in Nifty Through Futures Contracts

If you have a bullish or bearish view of the Nifty index, you can use index futures contracts to profit from price movements. For example, if Nifty is currently trading at 12,000 on November 01, 2021, and you have a bullish view, expecting the index to rise to 13,000 by the expiry date, you can purchase the Nifty NOV FUT contract at 12,000. If the index moves as per your expectations and touches 13,000 before the contract expires, you can square off your position.

On the other hand, if you have a bearish view and expect the index to fall to 11,000 by the expiry, you can short-sell the Nifty NOV FUT contract at 12,000. If the index moves according to your expectations and falls below 12,000 before the contract expires, you can square off your position and make a profit.

Investing in Nifty Through Options Contracts

Like futures, you can also use Nifty options contracts to profit from price movements. Using the same example, if Nifty is trading at 12,000 on November 01, 2021, and you have a bullish view, expecting the index to rise to around 13,000 by the expiry, you can purchase a call option contract for the index with a strike price of your choosing. Specifically, you can buy the Nifty Nov 13000 CE option contract since you expect the index to move up to around 13,000. Alternatively, you could purchase the index call option contract with a strike price lower than the current trading price of the index, but this would require a higher premium, driving up your initial investment costs. Once you have purchased a call option contract, if the index moves up as per your expectations, you can square off your position.

Similarly, if you have a bearish view and expect the index to fall to around 11,000 by expiry, you should purchase a put option contract for the index with a strike price of your choice. Specifically, you can buy the Nifty Nov 11,000 PE option contract as you expect it to fall to around 11,000. When the index falls, you can square off your positions and profit from your investment.

Invest via ETFs: Buy and sell Nifty 50 ETFs like individual stocks

NIFTY 50 ETFs (Exchange-Traded Funds) are a great way to invest in the NIFTY 50 index. They are a convenient, easy, and cost-effective way to gain exposure to the Indian equity market. Here are the steps to invest in NIFTY 50 ETFs:

• Open a Demat and Trading Account: You will need to open a Demat and trading account with a broker that offers NIFTY 50 ETFs. This account will hold your shares and other securities, and allow you to trade on the stock exchange. Look for a broker with low brokerage fees and a good reputation.
• Choose the NIFTY 50 ETF: Research and select the NIFTY 50 ETF you want to invest in. Different brokers may offer different options, so compare the available ETFs before choosing one that aligns with your investment goals and risk tolerance.
• Place a Buy Order: Once you have chosen your NIFTY 50 ETF, place a buy order through your broker. You can do this through your broker's online trading platform or by contacting them directly. Make sure to check the current price of the ETF before placing your order.
• Monitor and Manage Your Investment: After your order is executed and the ETF units are credited to your Demat account, remember to monitor the performance of your investment regularly. You can also make adjustments to your portfolio as needed to align with your investment strategy and goals.

Investing in NIFTY 50 ETFs offers several benefits:

• Diversification: NIFTY 50 ETFs provide instant diversification across the top 50 large-cap companies in India, reducing the risk associated with investing in individual stocks.
• Low Investment Amount: You can start investing in NIFTY 50 ETFs with a small amount, such as Rs. 500 per month through a Systematic Investment Plan (SIP). This makes it accessible to a wide range of investors.
• Flexibility: ETFs offer flexibility in terms of investment amounts and strategies. You can adjust your investment amount at any time and utilise different investment strategies, such as lump-sum investments or SIPs.
• Low Costs: NIFTY 50 ETFs have low management fees and expense ratios, which can result in higher returns over time. The passive nature of ETFs, which track an index, contributes to their low costs.
• Liquidity: NIFTY 50 ETFs are traded on stock exchanges, providing liquidity to investors. You can buy and sell these ETFs during trading hours, just like individual stocks.
• Transparency: NIFTY 50 ETFs aim to replicate the performance of the NIFTY 50 index, providing transparency in their investment strategy. The ETF holdings are disclosed, and the performance can be easily tracked against the underlying index.

When investing in NIFTY 50 ETFs, it is important to consider certain factors:

• Risk and Volatility: Understand the risks associated with investing in the stock market, including market risk, sector risk, and stock-specific risk. NIFTY 50 ETFs can be volatile, so assess your risk tolerance before investing.
• Investment Goals: Define your investment goals and time horizon. Consider whether investing in NIFTY 50 ETFs aligns with your short-term and long-term financial objectives.
• Costs and Fees: While ETFs generally have lower fees, it is important to consider the expense ratio and other costs associated with the ETF, as these can impact your overall returns.
• Tracking Error: Compare the performance of the NIFTY 50 ETF with the underlying index. A lower tracking error indicates that the ETF is closely following the index's performance.
• Tax Implications: Understand the tax implications of investing in NIFTY 50 ETFs, including short-term and long-term capital gains taxes, to make informed investment decisions.

Invest via SIP: Choose a platform, complete KYC, select a fund, and set up a payment method

Choose a Platform

Firstly, you need to choose a platform to invest in Nifty 50 Index Funds. You can either choose to invest through a fund house's official website or via various online platforms and mobile apps. Some popular platforms for investing in Nifty 50 Index Funds include Policybazaar, Groww, and smallcase. These platforms offer a range of investment options and tools to help you make informed investment decisions.

Complete KYC

Once you have chosen a platform, you will need to complete the Know Your Customer (KYC) process. This typically involves providing identification and address proof documents, such as your Aadhaar and PAN card details. The KYC process is a regulatory requirement to ensure the safety and security of your investments.

Select a Fund

After completing the KYC process, it's time to select a Nifty 50 Index Fund that aligns with your investment goals and risk tolerance. Consider factors such as the fund's performance, expense ratio, tracking error, and the reputation of the fund house. Compare the top Nifty 50 Index Funds in the market and choose one that best suits your needs.

Set Up a Payment Method

Finally, you will need to set up a payment method to fund your investments. This can be done by linking your bank account or providing payment details for the Systematic Investment Plan (SIP) transactions. Review all the details you have entered to ensure accuracy, and then make the initial investment payment. Once the payment is confirmed, your SIP plan will be activated, and subsequent investments will be deducted according to the schedule you have chosen.

Frequently asked questions