Nifty 50 up by 22.18% in a year: Is It a Good Time to Invest?
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In this article, we will discuss
Since 2014, Nifty 50, the flagship index of NSE, has provided Indian investors with substantial wealth, increasing their net worth by 2.5X. As per reports, the value of Nifty 50 has doubled in 9 years with FIIs (foreign institutional investors) purchasing $49.21 billion worth of Indian equities and domestic institutions pouring in a whopping ₹7 lakh crore. This performance has been backed by India becoming one of the fastest-growing economies in the world.
The prevalent investor sentiment on the future performance of the Indian stock market is bullish, making investing in Nifty 50 a lucrative opportunity. There are multiple ways to invest in Nifty 50, including direct indexing, ETF (exchange-traded funds), index mutual funds, etc. So, is it a good time to start investing in this index?
The following sections will provide all the information you need to decide your stance.
A Brief Overview of the Nifty 50 Index
Nifty 50 is a benchmark index of the Indian stock market on the National Stock Exchange (NSE). It represents the top 50 companies listed on the exchange in terms of their free-float market capitalisation. In simple words, it represents a basket of the 50 largest companies in India.
The Nifty 50 index is the most frequently referenced indicator of the Indian stock market along with BSE Sensex, which represents the top 30 companies of the Bombay Stock Exchange (BSE). As it represents the largest and most reputable companies in India, it also reflects the state of our country’s economy. Therefore, any movement of this index reflects changes in the broader market.
The index can be used for various purposes such as benchmarking portfolios, operating index funds and other structured products and understanding Indian market conditions.
The stocks listed on Nifty 50 altogether account for 65% of the free-float market cap of all securities listed on Indian exchanges. In other words, market liquidity is highly concentrated in the top 50 stocks listed on the NSE.
Some of the renowned companies listed on Nifty 50 are Reliance Industries Ltd, HDFC Bank Ltd, ICICI Bank Ltd, Infosys, ITC, TCS, etc.
How Are Stocks Selected for the Nifty 50 Index?
Only stocks listed on Nifty 100 are eligible to be listed in Nifty 50. However, there are a set of eligibility criteria that these stocks need to fulfil to be added to the index. Here is a brief overview of these parameters:
- Listed Stocks: A company can be listed on Nifty 50 if it is listed on NSE and has a listing history of at least 6 months. In addition, its share must be tradable in the futures and options segment of the NSE.
- Basic Construct: Only free-float shares are allowed to be listed on the Nifty 50 index. The average free-float market cap of a Nifty 50 stock needs to be a minimum of 1.5 times the average free-float market cap of the smallest listed company on the Nifty 100.
- Liquidity: These stocks must have high liquidity and always be available for trading. A Nifty 50 stock needs to have been 100% tradable for six months as of its latest review.
- Index Weightage: Every stock in Nifty 50 does not have the same weightage. Instead, companies ranked higher on the index carry higher weightage due to their larger market share. For instance, HDFC Bank Ltd which has a higher market cap than ICICI Bank Ltd also carries higher weightage as of data from March 2023.
- Reviewing and Balancing: Nifty 50 is reviewed by a professional team led by the Board of Directors of NSE Indices Limited. Based on this review, the index is rebalanced on January 31 and July 31 of every year based on the average six months’ data of stocks.
Returns from the Nifty 50 Index
In 2023, India’s equity markets have been performing favourably compared to its emerging market peers. So far, Nifty 50 has followed the market trend by making net gains of 3% in May, 4% in April and 7% since March. The index hit its all-time high of 18,887.60 in December 2022 and as of the latest data, it’s just 50 points away from it.
So, how has this performance affected the returns of Nifty 50?
As of June 19, 2023, Nifty 50 has achieved 22.18% gains over one year and 73.31% gains over the last five years, approximately. This means if an investor had invested ₹1,00,000 in the index over a year, he/she would have made ₹22,180 in profits. Over a 5-year investment tenure, he/she would have made ₹73,310 in profits.
Historically, there have been times when the index has given low and even negative returns. But on average, the Nifty 50 has risen considerably, delivering an average of 12.53% annualised returns over the last decade.
Benefits of Investing in Nifty 50
Here are some of the advantages of investing in Nifty 50 stocks directly or via index funds:
- Diversification: Whether you invest in index funds or track the index yourself, you will get to invest in many stocks. Nifty 50 includes stocks from 14 different sectors, allowing you to diversify your portfolio across India's top-performing companies. Hence, losses from a single stock or a sector will not affect your portfolio much.
- Low Entry Barrier: Index funds and ETFs allow you to gain exposure to the Indian market with a small amount of money. You can start investing in a Nifty 50 fund with a sum as little as ₹100/month via an SIP (Systematic Investment Plan).
- Returns Potential: When tracking Nifty 50, you get returns that reflect the value of the index. Investing in a passive way allows you to get good returns without taking on the additional risks of picking the right stocks. This makes Nifty 50 investments ideal for the long term.
- No Investment Biases: A great advantage of investing in the index is that it eliminates human biases that affect investment returns. Passive investments follow an automated methodology that has been proven to be efficient.
While index investments are ideal for beginners with moderate risk appetite, other investors do prefer active investment and trading strategies.
Limitations of Investing in the Nifty 50
Here are some of the limitations of investing in the Nifty 50 index:
- Sectoral Concentration: Over the years, the Indian stock market has become highly concentrated. Today, 80% of all capital invested in NSE belongs to the top 5 sectors- financial services, IT, oil and gas, FMCG and automobiles. There is also plenty of concentration at the stock level; the top 5 stocks represent 40% of Nifty.
- Lack of Flexibility: When you invest in Nifty 50 funds or ETFs, you cannot make changes to the portfolio to account for recent developments in the markets. Similarly, you cannot reduce your potential losses.
- Inability to Generate Alpha: Passive investments work on the principle that markets are efficient and thus, value stock prices fairly. However, in reality, many stocks are not valued fairly, creating opportunities for active investors and traders. But, passive traders face the brunt end of it.
How Samco Can Help to Ace the Index
Many traders do not have the tools to actively measure their portfolio returns against a benchmark. The New-Gen Samco App allows you to create your own personal index and improve your performance by beating the market. It provides personalised market insights and professional assistance to help you achieve your financial goals.
Here are some of the features of Samco’s advanced trading and investment platform:
- Personal Index: Create a personal index for your portfolio and track it using Samco.
- Net Worth Tracker: Watch as your net worth grows and compare it with other Samco users
- Social Sharing: Share the results of MyIndex and Net Worth with your friends.
- Peer Comparison Tracker: You can also compare your Personal Index performance with other Samco users.
- Star Fund Manager: Use this to compare your portfolio and trading performance against fund managers operating funds over ₹20 crore.
- Trading Style Analysis: Understand your trading style category and view your traded turnover and work on improvements.
Thousands of investors and traders have taken the pledge to ace the index. Do you want to outperform the market as well?
How Can You Invest in Nifty 50 Stocks?
The following are the different ways to invest in the Nifty 50 index:
In this option, you check the index and invest in all the stocks directly as per their weightage. This means that you will have to monitor and rebalance your portfolio daily as per changes in Nifty 50. This method provides the advantage of being in direct control of your portfolio and avoiding fund management fees. However, it is time-consuming and complex.
Another way to invest in the Nifty 50 index is through derivatives such as futures and options. These are financial contracts where the underlying asset is an index. Advanced traders with high-risk appetites can speculate or hedge on the upward/downward movement of the Nifty 50 using derivative contracts.
Exchange Traded Funds (ETFs) are like mutual funds as they pool money from multiple investors and invest in a basket of stocks. However, unlike mutual funds, you can buy or sell index ETFs on the stock exchange during trading hours. A Nifty 50 ETF tracks the performance of the listed stocks and generates similar returns.
Index funds are equity mutual funds that invest in securities listed on their respective benchmark indices. These are professionally managed by a fund manager who monitors the portfolio on your behalf. You can invest in Nifty 50 index funds at a very low cost.
However, index funds carry some limitations. You cannot directly sell your investment and you have to pay an expense ratio and an exit load to the fund house.
Conclusion
An index like Nifty 50 is perfectly suitable for first-time investors and acts as their stepping stone in the world of investing. They offer a cheap way to take broad-market exposure and get returns in line with the Indian stock market.
Although this index is volatile in the short term, it has a history of delivering good returns in the long run. Advanced traders and investors can try out various strategies to ace the index, but that requires knowledge, patience and the willingness to take high risks. So what are you waiting for? Join Samco today and start your stock market journey with confidence. Click here to open your free Demat account with Samco now.