One of India’s broad-market benchmark indexes, the Nifty 50 measures the price fluctuations of the 50 biggest businesses listed on the National Stock Exchange. It is commonly employed by traders to measure the overall performance of the stock market. One of the key reasons why the Nifty is regarded as a reliable indication of the success of the stock market is because it includes firms from 14 different sectors. Therefore, an investor who invests in the Nifty 50 index can have exposure to a diverse selection of firms, therefore substantially reducing investment risk.
How should you then invest in Nifty? Since it is an index, it cannot be purchased directly like a company’s shares. However, there are more methods to exploit the index to profit from its changes. This is precisely the subject of this essay.
History of the NIFTY 50
NIFTY 50 referred to the fifty most popular large-cap stocks on the New York Stock Exchange in the 1960s and 1970s. These stocks were regarded as safe investments or blue-chip stocks that were the best in class and traded at a premium. Coca-Cola, Xerox, and IBM are examples of NIFTY 50 equities that investors bought without a second thought. The NIFTY 50 gained further significance in 1996 when the NIFTY 50 Index debuted on the National Stock Exchange of India and became a mainstay of the Indian stock market.
How are the 50 NIFTY Stocks Selected?
The majority of the NIFTY 50 firms have a solid financial sheet, impressive growth rates, and a substantial worldwide reach. For context, the NIFTY 50 Index includes firms such as Infosys, Reliance Industries, HDFC Bank, ITC, Asian Paints, etc.
The NSE rates businesses based on their free-float market capitalisation (free float essentially means shares available for the general public to buy and are not locked in). The top 50 are then selected for inclusion in the index. Additionally, stocks must satisfy the following criteria:
Liquidity, i.e. sufficient traded volume based on more specific standards.
Should be available for trading inside the futures and options (F&O) sector.
Listed for a minimum of six months (or if it just had an IPO, then listed for at least one month)
This list is revised every six months to delete and add firms to the index. The NSE offers the general public four weeks’ notice prior to implementing any modifications. This is significant for many baskets and financial instruments that are based on the ownership of NIFTY equities, allowing them to begin rebalancing their portfolios.
Studies have shown that when a firm is added to an index, its stock price rises solely on the news of its addition, as many worldwide funds and ETFs must add it to their portfolios. When a stock departs an index, the opposite holds true. Long-term, the influence of these fluctuations is obviously limited, and the stock trades depending on its own fundamentals.
This suggests that the NIFTY regularly eliminates “losers” — 20 of the 50 stocks that comprised the NIFTY in 2010 are no longer included – meaning that 40 percent of the index has changed in just 10 years.
What are the advantages and disadvantages of investing in NIFTY 50?
These 50 equities account for 65 percent of the total market capitalisation of all NSE-listed businesses. In other words, if you summed the market capitalizations of all 1,300 firms listed on the NSE, the 50 NIFTY companies would account for 65 percent of the sum, while the remaining 1,250 companies would account for 35 percent. About 50 percent of all trading on the NSE are conducted in these 50 equities. Consequently, even market liquidity is disproportionately concentrated in these 50 stocks.
Therefore, for any investor who utilizes the NIFTY 50 index as a guide, it is a great starting point for investing in the market, given that a small group of stocks provides maximum exposure to the whole market.
It is regarded as a trustworthy indication of the success of the stock market in part because it comprises businesses from fourteen different industries.
However, the primary problem is that even within the NIFTY 50, there is a great deal of concentration.
The top five industries of the index are now financial services, information technology, oil and gas, consumer packaged goods, and cars. The index has gotten more concentrated over time; in 2010, the top five sectors accounted for sixty percent of NIFTY stocks. Today, this percentage is about 80%. As with the turnover of stocks, the turnover of sectors is likewise substantial. Currently, 35% of the index is made up of financial services firms, including banks, NBFCs, etc. In 2010, this proportion was merely 15%.
However, even among these 50 stocks, there is a great deal of concentration at the stock level; the top 5 stocks in the NIFTY account for 40% of the index’s weight.
Eligibility for listing on the Nifty:
For a firm to be listed in Nifty, it must meet the NSE’s specific qualifying requirements.
These requirements include:
The ease and speed with which a stock may be purchased or sold without impacting its price is its liquidity. Simply said, a stock is liquid if it can be purchased in large quantities at the present quoted price. Liquidity is measured by the NSE in terms of Market impact cost, or the costs incurred while trading an index stock. For a stock to be included in the NIFTY 50, it must have traded for a minimum of Rs. 10 crores at a market impact cost of less than or equal to 0.50 percent during the previous six months.
2. Float adjustment:
Free-float market capitalization is a measurement of a company’s market capitalisation that is freely accessible for trade. It is determined by multiplying the share price by the number of freely tradable shares. Therefore, it excludes locked-in shares, including promoter shares. Simply said, it is the case. For a firm to be included in the Nifty, its float-adjusted market capitalization must be at least 1.5 times the average free-float market capitalization of the index’s lowest constituent.
3. Trading frequency:
In the past six months, the Company’s trading frequency should have reached 100 percent.
4. History of listings:
The Company’s listing history should span at least six months. For a freshly listed firm to be included in Nifty, it must meet the remaining criteria for a period of three months instead of six.
5. Company should be permitted to engage in Futures and Options trading.
How to Invest in the NIFTY 50
Once you have decided to invest in the NIFTY 50, you can investigate one of the two investment strategies.
1. Derivative Agreements
Through derivative products such as Futures and Options, investors may trade NIFTY 50 equities (F&O). These contracts utilize the index as the underlying asset, hence the price movements and variations are tied to the NIFTY Index.
Essentially, (F&O) are derivative contracts that let market participants to buy and sell a stock or index at a certain price and/or on a future date. Although NIFTY derivatives are regarded as one of the greatest ways to trade, they are not suitable for all investors, especially novices. This is due to the fact that it is a more short-term plan, as contracts expire in three months. Due to the high level of speculation, the F&O industry is also dominated by hedgers and speculators with a bigger risk appetite and superior market performance monitoring skills.
2. Index Mutual Funds and Exchange Traded Funds (ETF)
Those with a long-term investment horizon and a desire for lesser risk can consider investing in the NIFTY through index mutual funds or ETFs. This is a form of mutual fund whose portfolio consists of stocks, bonds, indices, currencies, etc., and is designed to match/track the constituents of a market index such as the NIFTY.
These funds have an identical stock portfolio to the NIFTY index, allowing you to take advantage of a variety of perks.
- Participants are not required to invest significant quantities of money because index funds basically combine money from several investors. Most mutual fund firms would enable you to invest as little as Rs 500 per month via SIP plans, allowing you to become a part-owner of all 50 NIFTY 50 equities in the exact same proportion as the index.
- Lower Total Expense Ratio (TER): This is the proportion of the total investment that each mutual fund charges in order to operate the company. Index mutual funds have a low TER because, unlike active funds, they are passive and are not traded regularly in big quantities.
- Since these index funds are simply replicas of the NIFTY 50 index, fund managers do not require the assistance of a huge staff of analysts and market researchers. It is easier to determine which stocks to purchase and when to buy and sell because there is no active buying and selling of stocks in large numbers.
- Investing in the NIFTY through an ETF is an excellent way to gain exposure to the equity market. Given how concentrated the market is, a low-cost product gives you access to a substantial portion of the market. On top of this, you may add smaller firms, industries, and others based on your belief and comfort level.
How Is the NIFTY Computed?
An expert staff at NSE Indices Limited controls the Nifty index on the stock market. The Index Advisory Committee (Equity) has been established by NSE Indices Limited to give advice on small to large-scale issues pertaining to equity indices.
The NIFTY 50 is computed using the free-float market capitalization weighted approach, wherein the level of the Index represents the total market value of all companies comprising the Index compared to the base period beginning on November 3, 1995.
The base period for the NIFTY 50 index is November 3, 1995, which marked the one-year anniversary of the NSE Capital Market Segment’s activities. The index’s base value is 1000, and its base capital is 2.06 trillion rupees.
The total market cap or market capitalization of a corporation is the product of the market price and the total number of outstanding shares.
Capitalization on the Market = Outstanding Shares * Price
Free Float Market Capitalization = Outstanding shares * Price (Investible Weight Factors)
Index Value = Current Market Value / Base Market Capital * Base Index Value (1000)
The index’s base market capital is the total market capitalization of each component security during the base period. The market capitalization during the base period is equal to the base Index value of 1000.
Investible Weight Factors (IWF) is a unit of a business’s floating stock stated as a figure that is open for trade and is not held by entities with a strategic interest in the firm. A bigger IWF is indicative of a larger number of shares held by investors, as recorded under the public category in the ownership pattern of each corporation. The IWF’s for each firm in the index is derived based on the public shareholdings declared in the companies’ filings with the stock exchanges.
Investing in a Nifty index fund is quick and easy. Investing in index funds can enhance the possibility that your funds will do well over the long run, allowing you to achieve your financial objectives and needs in a significantly shorter time frame. In addition, since these funds are passively managed, you need not devote a great deal of effort to monitoring your portfolio. Now that you have a better understanding of how to invest in the Nifty index, you can simply invest and enjoy the benefits.