What is the Nifty 50 Index and How to Invest in it?

Which Sectors are Featured in the Nifty 50 Equity Index?

As you might have noticed from the above list, the 10 largest companies featured in this Nifty large cap index belong to a variety of sectors. The below table illustrates the exposure of the index to various sectors and their individual weights as of 30^th June 2023: 

As you can see, while Nifty 50 Index is diversified across multiple sectors, its exposure to financial services sector is in excess of 37% due to the inclusion of large cap BFSI stocks like the HDFC twins, ICICI Bank, Axis Bank and Kotak Mahindra Bank to name a few. Apart from this, the index also has significant exposure to stocks that are part of IT, Oil & Gas as well as FMCG segments. Since, the individual weight of each sector is calculated on the basis of individual stocks featured in the Nifty 50, so, the sectoral weight is also liable to change when the index undergoes semi-annual rebalancing. 

How to Invest in the Nifty 50 Index?

Now that you have a better understanding of what the Nifty 50 is, let’s consider the various ways you can invest in this diversified index. In broad terms, there are 3 ways to do this –through a Nifty 50 index fund, through a Nifty 50 ETF or direct investment in equity stocks comprising the index. Here’s what you need to consider when choosing any of the options: 

Nifty 50 Index Funds

Most fund houses have introduced Nifty 50 Index Funds that replicate the index and give returns that are in line with the index after adjusting for tracking error. Tracking error refers to the difference between index returns and the returns provided by the Index Mutual Fund due to fund management expenses or cost of maintaining cash/cash equivalent reserves to ensure liquidity.

Since a Nifty 50 Index Fund in India invest in India’s largest listed companies, it can be classified as a large cap scheme that is managed passively. Investors do not need a Demat (dematerialised) account or a brokerage account to make this investment. Index Funds are considered by many as one of the simplest and least expensive ways to invest in any index including the Nifty 50.

Nifty 50 Exchange Traded Funds (ETFs)

Exchange Traded Funds (ETFs) are similar to mutual funds as they invest in a portfolio of stocks or other assets, these underlying investments are then converted to units that are sold to the investor bases on the applicable market price. In the case of a Nifty 50 ETF, the underlying assets are the stocks featured in the Nifty 50 Index as per the applicable weights.

The key difference between an index scheme and ETF based on an index is that ETF units are listed on stock markets and can be traded in real-time, so intraday trading strategies similar to shares are available. This is not possible in the case of mutual funds like Index funds in India. Additionally, a Demat account is mandatory for anyone who wants to buy or sell ETFs in India. Nifty 50 ETF investors will incur brokerage charges, however, the fund management charges of this investment option is typically lower than that of index funds.

Direct Equity Stock Investments

It is theoretically possible to purchase all 50 stocks included in the index and maintain a portfolio allocation to mirror the individual weight of each stock as per the Nifty 50 Index. However, this strategy would be extremely time consuming and difficult to continue in the long term by an individual investor. Additionally, each buy or sell transaction would feature brokerage charges, depository charges, securities transaction tax, etc. which would further add to the cost of maintaining a portfolio of stocks that mirrors the Nifty 50.

As you can see, investing in a Nifty 50 Index Fund or a Nifty 50 ETF are the simplest and most effective ways to ensure that you are able to benefit from growth of this large-cap equity index without incurring exorbitant costs. 

Frequently Asked Questions (FAQs)

Q. What are large-cap stocks? 

A. As per SEBI (Securities Exchange Board of India) definition, large cap stocks refer to listed equity shares of the 100 largest companies in India based on the free-float market capitalization calculation method. These 100 companies are market leaders and among the most well established companies in the country.

Q. Can I invest in international indices as an Indian investor?

A. Yes. Indian investors can invest in international indices by opting for mutual funds from Indian mutual fund companies that invest in foreign indices. These investments can help you gain international exposure and help diversify your investment portfolio beyond the domestic market.

Q. What are some large cap indices in India apart from the Nifty 50 Index?

A. Some of the popular large cap indices other than the Nifty 50 Index are the S&P BSE Sensex, S&P BSE Sensex 50, S&P BSE Sensex Next 50, Nifty Next 50, Nifty 100, S&P BSE LargeCap, and S&P BSE 100.

Q. Are large cap index investments actively managed or passively managed?

A. Investments made into a large cap index fund or exchange traded funds are passively managed. This means the investment portfolio will replicate the constituent stocks featured on the chosen index without any fund manager bias.

Q. Are large cap index investments safe?

A. Large cap mutual funds that replicate an equity index make investments in equity stocks so they are prone to market-risk and do not offer assured returns. On the other hand, large cap stocks are relatively less prone to short-term volatility so they are considered as one of the safest types of equity investments available in India.