Direct stock market investing is not for everyone. Among the alternatives, investing in index funds and mutual funds has gained popularity among investors in recent years. Essentially, index funds track the entire market by buying all shares included in an index like the BSE Sensex or Nifty 50, rather than buying individual stocks. In the Indian context, many invest in the Nifty 50 index, a benchmark index that represents the weighted average of 50 of the largest Indian firms listed on the National Stock Exchange (NSE). This blog post will handhold you on how to invest in the Nifty 50 index.
If you are interested in diversifying your portfolio by investing in Nifty 50 index, we have got you covered. Read on as we discuss how to buy Nifty 50.
What is a Nifty index fund?
Before we discuss how to invest in a Nifty 50 index fund, let’s learn the basics and understand what is a Nifty index fund. The Nifty index comprises stocks of various companies. So, when one invests in this mutual fund, the money is invested in the stocks of those companies that constitute the Nifty index. Therefore, when one invests in a Nifty fund, their money is parked in the index rather than in individual stocks.
In general, the components of the Nifty fund reflect or mimic the Nifty 50 index and closely follow the performance of the index. Thus, these types of mutual funds offer excellent risk management with exposure to the broader market.
Advantages of investment in a Nifty Index fund
If you are wondering how to invest in Nifty or how to buy Nifty 50, you must be keen to take full advantage of this investment. Here are some top advantages of investing in a Nifty index fund that you can leverage while investing your money in the Nifty 50 index funds.
H3: Stable returns
The first and foremost benefit of investing in the Nifty index is stable returns. The return one can earn from the Nifty mutual fund investment tends to be more stable in comparison to other equity fund investments. It is primarily because it aims to offer similar returns to the index it is following. Plus, it invests in the 50 stocks listed in the Nifty index.
Lower risk
Another essential benefit of investing in a Nifty index fund is the lower investment or market risks in comparison to other equity investments. When you invest in a Nifty 50 index fund, it provides exposure to the broader market, diversifies your portfolio effectively, and reduces market-associated risks.
Bias elimination
Nifty 50 index fund investment also eliminates emotional biases or human biases from investment decision-making. As this type of investment mimics the Nifty index, stock selection process is automated and doesn’t require emotional involvement. The elimination of bias means you don’t have to worry about manager bias in investing decisions.
How to invest in Nifty: Trading tips & strategy
If you are thinking, “How to buy Nifty 50,” here are some tips and strategies to help you invest in index funds:
- Analyze the market
One of the best tips to invest in a Nifty 50 index fund is to analyze the market. You should analyze the market and options thoroughly before putting your money into it.
- Understand your risk tolerance
You should also have in-depth knowledge of your risk tolerance or risk appetite and choose index funds that align with your risk tolerance level.
- Choose your strategy
Choosing your investment strategies properly is essential to succeed in your investment. You can take advice from your fund manager or equip yourself with essential knowledge to plan your investment.
- Manage your risk
Though it is passive investing, you should monitor your index fund performance.
Investing in Nifty via derivatives
You can invest in Nifty through various modes and one of the most popular methods is via derivatives. Like futures and options, sophisticated derivatives contracts are also index-based which indicates the price movement of the derivatives that are linked to the Nifty index it is following. When you start trading these derivatives, you can automatically generate profit from the price fluctuations of that particular index these derivatives are following. However, you must remember that the index is not a stock and will not be accepted once the derivative contract expires. All the index derivatives must be settled in cash at the end of the due date or expiry date.
Investing in Nifty through futures contracts
Another popular method of investing in the Nifty 50 index is through futures contracts. With Nifty index futures contracts, you can take advantage of the stock price fluctuations if the Nifty index is either bullish or bearish. Let’s assume Nifty is trading at 12,000 on May 1 2020 and your approach is bullish, then you can expect about 13,000 by the time the contract expires. So, you simply need to buy the contract future at 12,000 and if the price moves to 13,000 before it reaches its expiry date, you will automatically generate profit from the investment. On the contrary, if you have a bearish approach, you would expect it to go down up to 10,000 by the expiry date. If it happens, then you can generate a profit by shorting the 12,000 contract.
Investing in Nifty through options contracts
You can also invest in the Nifty index through option contracts and benefit from market price fluctuations. If you expect the price to rise around 13,000 and have a bullish sentiment, you can buy an index call option contract at your chosen strike price. You can also buy an index call option contract at an exercise price. For a bearish sentiment, and the price is expected to fall at the level of 11,000 at the time of its expiration, you can buy an index at your chosen strike price. You can benefit when the price goes down if you invest in an 11,000 Nifty options contract.
Investing in Nifty via mutual funds
Mutual funds are quite similar to Nifty funds and have the same stocks as the index. If you want to benefit from the performance of the index, you can choose to invest in Nifty via mutual funds as these funds effectively track the performance of the index. These funds are more affordable compared to other mutual funds and also offer diversification, giving you exposure to all 50 components of the Nifty index.
How to invest in Nifty Index Fund
If you still wondering how to invest in a Nifty 50 index fund, here is a step-by-step guide:
Step 1: To invest in the Nifty Index Fund, one must first get registered with the help of a reliable stockbroker and open a DEMAT trading account.
Step 2: To open a DEMAT and trading account, you need to fill out an application form. You must fill in your professional and personal details and also complete the KYC process. KYC details required are proof of identity, proof of address, and proof of age.
Step 3: After the application form for opening a DEMAT and trading account is submitted along with necessary documents, the stock broker will verify the documents and process your application.
Step 4: After the approval of the application, a unique username and password will be generated for the applicant. One can use this information to log in to the specific trading platform.
Step 5: Next, one needs to log in to the trading platform using the unique username and password. After logging in, you can go to the mutual fund section and select the Nifty Index Fund. Compare funds available for investment and perform a comprehensive analysis of past performance and track record of each fund before investing.
Step 6: After provisionally selecting a Nifty Index Fund, one must read carefully the scheme-related agreement and other such documents.
Step 7: Once you have finalized the Nifty Index Fund you want to invest in, you can choose either to invest in the SIP or buy units of the chosen fund by paying in lump sum.
Conclusion
Nifty index fund investment is a great option to get stable returns and reduce market volatility. Even if you are not a savvy investor, index investing would suit you as these funds are passively managed by fund managers based on certain criteria. These funds follow a Nifty index and match the returns of the index. If you are keen to know how to invest in a Nifty 50 index fund, you need to begin your journey by contacting a reliable fund house and selecting funds for investment.
