New investors may have come across the term wealth creation and how investing in the stock markets can help in achieving the same. An investor can expect to be rewarded substantially for a stock market investment if he/she is willing to remain invested for a longer tenure. These also have an inherent risk that the investor has to consider. In case the market performance is not up to the mark, one can end up losing a significant amount of capital. To limit such market risk exposure, one option is to invest in an index like Nifty.
So, what is a Nifty investment, and how can one directly invest in the Nifty index. Here is all the information surrounding the Nifty index and how to invest directly in it.
What is the Nifty index?
Nifty index, also commonly known as Nifty 50, comprises India’s top 50 large-cap stocks that belong to market leaders in respective sectors. It boasts of some of India’s biggest and most well-established companies.
The index is often used as a benchmark portfolio to gauge the overall stock market movement in India. Any changes to the NIFTY 50 index majorly comes from any significant changes in the prices of the 50 stocks that constitute the index.
How to invest in Nifty?
If an investor invests in the Nifty 50 index, he/she becomes part-owner of the companies that constitute the index. There are two main ways in which one can invest in Nifty.
1. Buying stocks of the index
One can buy stocks of NIFTY 50 in the same way as buying the stock of any other listed company, but this will incur significant amount of transaction costs as you will have to buy shares of 50 different companies.
2. Index funds tracking Nifty
The second option of investing in Nifty is to invest in Index mutual funds that track the NIFTY 50 index. These funds essentially mirror the NIFTY 50 composition. In simple terms, the funds have a portfolio that comprises the same stocks as the index and in the same proportion as in the index. Thus, a NIFTY 50 index fund will comprise the 50 stocks that form part of the NIFTY 50 index.
3. ETFs tracking Nifty
An ETF or exchange traded fund is a mutual fund that tracks indices like Nifty. When an investor buys units of an ETF, he/she is essentially buying the underlying securities that form part of the index, in the weightage as the index. For instance, by investing Rs. 5,000 in a Nifty ETF, a stock that has 10% weightage in Nifty will get 10% of the investment amount, and so on.
Benefits of investing in Nifty via index funds and ETFs
Here is how investors can benefit from investing in Nifty index via passive investment, including index funds and ETFs:
1. Investment flexibility
With index funds and ETFs that follow the Nifty index, one can enjoy the flexibility of investing through SIP or a lump sum amount. An investor can also increase or decrease the investment amount at any time and by any amount. This makes the investment process convenient and hassle-free.
2. Low-cost investment
Nifty 50 index funds replicate the composition of NIFTY 50 index. Thus, it eliminates the requirement for analysts to aid the fund manager in making investment decisions like stocks to buy, sell, etc. It also does away with the requirement for active buying and selling of stocks. This results in the expenses of fund management being significantly low. This further translates into low fees being passed on to an investor.
3. Low investment amount
Since index funds and ETFs pool investor money, Fund houses allow smaller investment amounts in the fund. Thus, an investor can begin investing with as little as Rs. 500 per month via SIPs and can gain exposure to all the 50 stocks of a Nifty index in the same proportion as the index.
4. No need for portfolio rebalancing
By investing in a Nifty index fund, an investor’s investment is managed by a fund manager who is responsible for maintaining the fund composition and proportion as the NIFTY 50 index. Any rise or decline in the stock weightages is handled by the fund manager. Thus, an investor does not have to look after portfolio rebalancing to replicate the NIFTY 50 index.
5. Avoids investment bias
A NIFTY 50 index fund or ETF will follow a rule-based automated approach to investing. It limits the role of a fund manager as far as stock selection and buy or sell decisions are concerned. This eliminates the human bias that would otherwise creep into investment decisions.
Which investment mode to choose – direct stock buying or passive Index Funds/ETFs?
Investing directly in stocks of Nifty index can be an expensive affair and often complicated, especially if an investor wants to replicate the index composition. The amount of money required to replicate the NIFTY 50 index can be substantial. Since it is not possible to buy a fraction of a stock in India, an investor has to purchase an entire stock, which can mean high cost, especially for investing in large-cap stocks.
Here is an example of the drawbacks of direct stock buying to invest in Nifty.
Let’s say Ms. Nisha wants to invest Rs. 10,000 in NIFTY 50 per month. A single stock of Nestle costs over Rs. 19,500 and a stock of Bajaj Finance costs over Rs. 7,000. Thus, with an investment amount of Rs. 10,000, Ms. Nisha cannot buy even one stock each, of these two companies. She can therefore not imagine buying all the stocks that form part of the NIFTY 50 index with her limited funds.
Apart from large sums of money, she will also have to buy all the 50 stocks as per their weightage in the index and maintain the weightage daily. This can be time-consuming and difficult for any investor. Since the weightage of stocks can rise or fall, one has to make the changes in their portfolio every day to replicate the index.
A simple solution to all the above-mentioned drawbacks is to opt for passive investment in Nifty via index funds or ETFs.
By investing in the Nifty index, an investor can gain exposure to 50 of the market leaders in the country. This can be a great investment opportunity for those looking to accumulate wealth in the long run. Investing in the Nifty index can be made cost-effective, convenient, and easy by using index funds and ETFs that follow the index.
One of the top benefits of passive investing is low expense ratio, resulting in lower cost of investment. Transparency, tax-efficiency, and lower human bias in investment decisions are some of the other benefits to be availed from passive investing.
Sensex has a more concentrated portfolio comprising top 30 stocks, whereas Nifty is made up of 50 stocks. Each has its own benefits of investment and may outperform each other during different market scenarios. Hence, you can invest in either depending on preference and portfolio diversification needs.
An index fund with higher assets under management is preferable. It is also advisable to opt for an index fund with lower expense ratio and lower tracking error.
An index is made up of some of the top representative listed companies from different sectors. These listed companies make up an Index and the companies under the index are called index constituents. Each index is linked to a specific stock exchange.
Giving up on the possibility to outperform, limited upside growth prospects, and mandatory requirement for a Demat and trading account are some of the limitations of ETFs as compared to regular mutual fund investment.