Investors have often come across the news headline related to NIFTY 50. Almost every newspaper and news TV channels show charts for investing in NIFTY 50. This word is most commonly heard among financial analysts. Now the question may arise as to, ‘What is NIFTY 50?’.
NIFTY 50 comprises of the index of the top 50 companies that are listed on the National Stock Exchange (NSE), based on float-adjusted market capitalization. Among the two most known barometers that investors uses to track the ‘Securities Market’, NIFTY 50 is one of them. There is also, a similar index that consists of 30 stocks that are listed on the Bombay Stock Exchange (BSE) known as Sensex.
How are NIFTY 50 stocks Determined?
The majority of NIFTY 50 companies display a strong balance sheet, impressive growth rates, and a sizable global reach. For better understanding, NIFTY 50 includes stocks like TCS, Nestle India, Bajaj Finance, ITC, Asian Paints, etc.
Companies are ranked by the NSE, based on the free-float market capitalization (includes stocks that are available to the general public and are not locked in). These 50 stocks become a part of the NIFTY 50.
However, there are other criteria involved. These include:
- Liquidity: An important consideration for a stock to be added for investing in NIFTY 50 is liquidity. It means that equities that are a member while investing in NIFTY 50 index must be easy to sell, and their trading volume must be large.
- Basic Construct: The top 50 large-cap companies from the NSE universe are chosen based on their free-float market capitalization. The market capitalization of a company is determined by multiplying its stock price by the number of shares that are currently available in the market. For example, the market capitalization of a firm, for instance, would be ₹ 50 lakh if it had 1 lakh easily accessible shares in the market at a price of ₹ 50 per share.
- Rebalancing And Reconstitution: The NIFTY 50 index’s 50 firms are not fixed in place. Every year, in the months of June and December, the index is rebalanced. The NIFTY 50 index eliminates stocks that would have had a decline in market cap or would have been suspended or delisted during the rebalancing process. The deleted stocks are then swapped out for emerging stocks whose market capitalization has met the criteria for entering the list. The NIFTY 50’s exposure to emerging stocks and sectors is automatically increased during the rebalancing process.
- Universe: A company must be listed on the National Stock Exchange in order to qualify for inclusion in the NIFTY 50 (NSE). Additionally, a company’s stock should be accessible for trading in the futures and options segment of the NSE. The company cannot be a component for investing in NIFTY 50 if it is not listed and traded on the NSE.
What are the pros of investing in nifty 50?
65% of the market value of all the companies listed on the NSE is made up of just these 50 equities. In other words, by adding up the market values of all 1,300 NSE businesses, the 50 NIFTY companies would account for 65% of the total, while the remaining 1250 companies would make up the remaining 35%.
Because a small number of stocks give a great exposure to the whole market, investing in NIFTY 50 index can become a good step for investors to begin their market research. Its inclusion of companies from 14 distinct national sectors is one of the key factors, contributing to its reputation as a trustworthy gauge of stock market performance.
How to start Investing in Nifty 50 directly?
1. Derivatives Contract:
Through derivative contracts like futures and options, investors can trade in NIFTY 50 derivatives (F&O). The index is used as the underlying asset by these contracts which mean that the price changes and volatility are linked with those of the Index NIFTY.
Fundamentally speaking, Futures and Options are derivative contracts that enable market investors to buy and sell securities at a given price and/or at a future date. Although NIFTY derivatives are regarded as one of the best trading strategies, they are not suitable for all investors, especially inexperienced ones. This is because the contract is a short-term strategy and expires in 3 months.
2. Index Mutual Funds and Exchange Traded Funds (ETF):
The ideal choice for investors wishing to invest in long-term perspective involving lesser risk intake can start investing in NIFTY through Index Mutual Funds or an ETF.
These are a form of mutual fund designed to mimic or track the elements of a market index like the NIFTY.
· Low-cost Investment:
Since Index funds essentially pool money from many investors, they don’t need to invest huge sums of money. Several mutual fund firms allow investors to contribute as little as ₹100 per month through SIP plans. Investors get exposure to the stocks in the same weightage as in NIFTY.
· Lower Total Expense Ratio (TER):
This is the fee percentage, charged by mutual funds on the overall investment for running a fund. The TER is low because index mutual funds are passive funds that follow the index and require no research.
· Less Tracking and Monitoring:
Index Funds replicate NIFTY 50. Thus fund managers don’t require assistance from a big staff of analysts and market researchers.
· Profitable First Investment:
Investing in NIFTY 50 as an ETF is an excellent way to begin increasing exposure to stocks. Due to the concentrated market, investors can access a significant portion of it with a low-cost offering. Depending on your belief and comfort level, you can layer on other stocks and sectors, industries, and others.
Investors can use the SMIFS elite app to start investing in NIFTY Mutual Funds and EFT. These routes are considered to be ideal routes for investment in NIFTY 50. If investors are advanced trader, they can always opt for NIFTY Futures and Options.
The top 50 companies listed on the NSE (National Stock Exchange) are part of Nifty 50. Investing in the Nifty 50 can help an investor build long-term wealth even when adjusted for inflation.