What is Nifty 50 Index Fund?

Investing in the stock market can be confusing for beginners given the vast array of financial products available and their associated risks. However, new investors can begin their journey with index funds, which are passively managed mutual fund schemes that track the performance of an underlying index.

For example, Nifty 50 mutual funds track the Nifty 50 index, which represents the top 50 companies listed on the National Stock Exchange (NSE) in India. In this article, we will explore the structure of Nifty 50, understand Nifty 50 mutual funds, and help you align your investment objectives with their features.

• Table of contents

1. What is NIFTY 50 Index Fund?
2. How does the Nifty 50 Index Fund work?
3. How to invest in a Nifty 50 Index Fund
4. How is the Nifty calculated?
5. Structure of Nifty 50 Index
6. Advantages of investing in Nifty 50 Funds
7. Key considerations before investing in Nifty 50 Funds
8. Who should invest in Nifty 50 Index Funds?
9. Bajaj Finserv Nifty 50 ETF: An investment opportunity

What is NIFTY 50 Index Fund?

A Nifty 50 index fund is a mutual fund designed to match the performance of the Nifty 50 index. This index represents 50 prominent and highly traded companies listed on the National Stock Exchange (NSE).

To meet this objective, the fund invests in the same stocks as the Nifty 50, maintaining identical weightage and proportions. The value of the fund fluctuates in line with the index.

Unlike actively managed mutual funds, a Nifty 50 index fund requires minimal intervention from fund managers. Once the portfolio is set to reflect the Nifty 50’s composition, no changes are made unless the index itself undergoes adjustments, such as the inclusion or removal of companies.

How does the Nifty 50 Index Fund work?

Passive investment approach: Unlike actively managed funds, index funds adopt a passive strategy. The fund manager invests in the same stocks as the Nifty 50 Index, maintaining the same weightage.

Broad diversification: These funds provide exposure to 50 large-cap companies across various industries, reducing the risks associated with individual stocks.

Lower costs: Since there is minimal active management, the expense ratio for index funds is generally lower than that of actively managed funds.

Index tracking: The fund’s portfolio adjusts automatically to reflect any changes in the Nifty 50’s composition, ensuring its performance closely follows the index.

How to invest in a Nifty 50 Index Fund

Steps to invest in Nifty 50 Index Fund

1. Select an investment platform

Mutual fund companies: Invest directly through the websites or apps of mutual fund providers.

Online investment platforms: Use various online investment platforms to access a range of mutual funds from different fund providers, including index funds.

Distributors: You can also get in touch with a distributor to start your investment in Nifty 50 Index Fund

2. Complete the KYC Process

Submit necessary documents such as your PAN card, Aadhaar card, and proof of address to complete the mandatory Know Your Customer (KYC) process.

3. Pick a Nifty 50 Index Fund

Research funds from various mutual fund houses, evaluating factors like the expense ratio, historical performance, and the provider’s reputation.

4. Begin Investing

Lumpsum Investment: Invest a single, fixed amount in one go.

Systematic Investment Plan (SIP)): Opt for regular, smaller investments, typically on a monthly basis.

How is the Nifty calculated?

The Nifty index is calculated by assessing the market capitalisation of its constituent companies. Market capitalisation is determined by multiplying a company’s share price by its equity capital.

To calculate the free-float market capitalisation, the equity capital is multiplied by the share price, and the result is further multiplied by the Investable Weight Factor (IWF), which represents the proportion of shares actively traded in the stock market.

The Nifty Index is derived using a base value of 1,000. The current market value of all index stocks is divided by the base market capitalisation, and the result is multiplied by 1,000 to compute the daily index value.

Formulas Used in Nifty Calculation

Market Capitalisation = Equity Capital * Share Price

Free float market capitalisation = Share Price * Equity Capital * Investable Weight Factor (IWF)

Index Value = Current Market Value / (1000 * Base Market Capital).

This methodology also adjusts for corporate actions such as rights issues, bonus shares, and stock splits, ensuring accurate representation of the index.

Structure of Nifty 50 Index

The Nifty 50 index is a diversified portfolio of 50 blue-chip companies across 13 sectors, such as finance, information technology, and healthcare. These companies are selected based on factors like market capitalisation, liquidity, and trading frequency. The Nifty 50 index is calculated based on the free-float market capitalisation of its constituent companies, which reflects the market's perception of their worth.

By investing in Nifty 50 MFs, you gain exposure to all these top-performing companies with one investment and can potentially benefit from their growth.

Advantages of investing in Nifty 50 Funds

Nifty 50 funds are passive mutual funds that aim to replicate the performance of the Nifty 50 index, subject to tracking error. Nifty 50 funds can either be index funds or exchange-traded funds (ETFs). They are managed by fund managers who create a portfolio composition that mirrors the constituents of the Nifty 50 index in the same proportion as the index.

The main difference between the index funds and ETFs is that ETFs are traded on the stock exchange and can be bought or sold throughout the day at prevailing rates. Index funds, meanwhile, like other mutual funds, are not traded on an exchange. They can only be bought or sold based on the net asset value, which is calculated at the end of the business day.

Nifty 50 funds offer several potential benefits to investors, such as:

• Diversification: By investing in a broad range of sectors and companies, you reduce the risk associated with individual stocks.
• Low cost: Nifty 50 MFs have lower expense ratios than actively managed funds because they are passively managed.
• Low entry barrier: You can start investing with a low initial amount through SIP investments and can participate in the growth story of India’s top companies. To plan your investments effectively, consider using an SIP calculator to estimate your potential returns.
• Liquidity: Since Nifty 50 MFs comprise the top stocks in India, the trading volume is usually high making it relatively easier for investors to buy or redeem units.
• Transparency: Nifty 50 MFs disclose their holdings and portfolio changes regularly, allowing you to track their performance.

Key considerations before investing in Nifty 50 Funds

Before investing in Nifty 50 MFs, it's essential to consider your investment goals, risk appetite, and associated investment costs.

• Goals: Nifty 50 MFs can be suitable for long-term investors who want to potentially grow their wealth over an extended horizon.
• Risk appetite: Nifty 50 MFs are relatively less risky than individual stocks because they offer diversification. However, they are subject to market risks, and their performance may fluctuate based on economic conditions.
• Costs: Nifty 50 MFs have relatively lower expense ratios than actively managed funds If you're trying to choose between lumpsum and SIP for a Nifty 50 fund, you can explore the potential returns on both types of investments with tools like lump sum SIP calculator to aid your decision-making process. potentially leading to higher real returns for investors.

Who should invest in Nifty 50 Index Funds?

Nifty 50 Index Funds are preferred choice for various types of investors, particularly those who:

1. Aim for Long-Term Growth

These funds are well-suited for investors with a long-term perspective, as they offer the potential for capital growth through investments in large, stable companies.

2. Prefer Simplicity in Investing

Ideal for individuals who want a straightforward investment option without the need for stock selection or active management.

3. Value Diversification

By investing in a Nifty 50 Index Fund, investors gain exposure to multiple sectors, reducing the risks tied to individual stocks.

4. Have a Moderate Risk Appetite

These funds are considered relatively low-risk since they focus on established large-cap companies.

5. Are Beginners in Investing

New investors can use these funds as an easy entry point into the stock market, with a less complicated and more accessible approach.

Bajaj Finserv Nifty 50 ETF: An investment opportunity

Bajaj Finserv Asset Management Limited offers the Bajaj Finserv Nifty 50 ETF - an open-ended exchange-traded fund tracking the Nifty 50 Index. This scheme can be considered by investors aiming for the potential for long-term wealth creation in sync with the return potential offered by the Nifty 50 Index companies, subject to tracking error.

Conclusion

Nifty 50 mutual funds can be a suitable investment option for investors who want to participate in the growth potential and stability of India’s top 50 companies. These funds offer diversification, relatively lower costs, and the potential for returns in line with the broader market. However, it's important to align your investment objectives with the features of the fund and consider your risk appetite before investing.

FAQs

How do I choose the best Nifty 50 mutual fund?

Choosing the best Nifty 50 mutual fund depends on various factors such as your investment objectives, risk appetite, and costs. You can also consider consulting with a financial advisor or using online tools to help you make an informed decision.

Is it a good idea to invest in a Nifty 50 mutual fund for the long term?

Yes, investing in a Nifty 50 mutual fund for the long term can be a suitable option. Long-term investing in equity-oriented schemes allows investors to potentially benefit from the power of compounding. To further optimise your return potential, you can consider a step-up Systematic Investment Plan. A step-up SIP allows you to increase your SIP investments at a fixed rate at regular intervals. A step up SIP calculator can help you understand how these steady increments can enhance your return potential when compared to a regular SIP.

Does Nifty 50 ETF provide compounded growth?

In mutual funds, you do not earn compound interest, but you can benefit from the compounding effect on your returns. When you invest in a Nifty 50 ETF, not only do you benefit from the price appreciation of the top 50 companies in the index, but may also receive dividends distributed by these companies. If these dividends and capital gains are reinvested, they can earn further returns, creating a compounding effect. Essentially, you earn returns not only on your original investment but also on the returns previously generated. Over time, this creates a snowball effect, allowing your wealth to grow at an accelerated pace. Using a compound interest calculator can help you project how much your investment could potentially grow through the power of compounding.

Can I SIP on Nifty 50?

Absolutely, you can invest in a Nifty 50 Index Fund using a Systematic Investment Plan (SIP).

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully. This document should not be treated as an endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purposes only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals, and horizon. This information is subject to change without any prior notice.