You must have come across news headlines mentioning Nifty 50 several times. Newspapers and TV channels flash NIFTY 50 charts almost every day. Investment experts continuously use the term ‘NIFTY 50’ while analyzing what will happen in the stock market. Qrius explains how to invest in Nifty50 and build considerable wealth in the long run.

What Is NIFTY 50 and how to invest in NIFTY 50?

NIFTY 50 is an index consisting of India’s top 50 large-cap companies that are leaders in their respective sectors. The NIFTY 50 lists the biggest and most reputed companies in India as part of the index.

We will talk about how these top 50 large-cap companies are selected, based on their free-float market cap a bit later. But for now, let’s keep it simple!

Think of the NIFTY 50 index as a basket of the top 50 large-cap companies in India, you can pick from.

The NIFTY 50 index is used as a hypothetical portfolio that can reflect the overall movement in the Indian stock market.

The change in the NIFTY 50 that you often see in the news comes from the change in the stock prices of the 50 underlying companies that constitute the index.

The Nifty 50 index holds significant importance within the National Stock Exchange (NSE) as a well-diversified index representing 50 carefully selected companies.

The index gives insights into overall market conditions.

The index encompasses various sectors such as Financial Services, IT, FMCG, power, oil and gas etc.

It is widely regarded as a reliable gauge of the Indian equity market, measuring the broader market’s performance.

The index follows a methodology that weighs its constituents based on free-float market capitalization.

It is based on the total market value of the stocks relative to a specific base period.

Acting as a benchmark index, the Nifty 50 plays a fundamental role for investors, serving as a reference point for funds.

How to invest in NIFTY 50: List of Nifty 50 stocks by stock weightage

If you want to learn how to invest in NIFTY 50, you will need to explore the key players shaping India’s economy and driving its growth, from industry giants to emerging powerhouses.

The Nifty 50 index, comprising the top 50 actively traded stocks on India’s National Stock Exchange (NSE), is a barometer of the country’s economic health and investor sentiment.

These are the big players that make up the NIFTY 50 index:

How to invest in NIFTY 50

Exploring the weightage breakdown of key market segments

Understanding the breakdown of weightage among different sectors offers valuable insights into the overall composition and performance of the market. By exploring the weightage distribution, you can invest in the NIFTY 50.

You will better understand the sectors that wield significant influence.

This will enable you to make informed decisions and capitalize on emerging opportunities.

How to invest in NIFTY 50: How is the Nifty 50 index computed?

The Nifty 50 index is computed using the free float market capitalisation-weighted method. Here’s how it works:

1. Selection of Stocks: The first step is to select the stocks that will be included in the Nifty index. The NSE has specific eligibility criteria, such as liquidity, trading frequency, and market capitalization, for the stocks to be considered.
2. Free Float Market Capitalisation: The index calculation relies on the chosen stocks’ free-float market capitalisation. Free float encompasses the shares actively tradable in the market, excluding those held by promoters, governments, or strategic investors. Market capitalization is derived by multiplying the prevailing market price of each stock by its corresponding free float.
3. Calculation of Index Value: The free float factor represents the proportion of shares available for trading, and the base market capitalization and base index value are reference values set at a specific base date.
   The index value is calculated using the formula:
   
   Index Value = (Sum of (Market Capitalisation of Stock * Free Float Factor) / Base Market Capitalisation) * Base Index Value
   
   
4. Periodic Review: The composition of the Nifty 50 index is reviewed periodically by the NSE. If stocks no longer fulfil the eligibility criteria, they can be substituted with alternative stocks that meet the required criteria.

How to invest in NIFTY 50: Frequently asked questions (FAQ’s)

1. What is Nifty?

The term ‘Nifty’ refers to a stock market index established by the National Stock Exchange (NSE). It derives its name from ‘NSE Fifty,’ indicating the inclusion of the top 50 stocks listed on the NSE.

2. How to buy/invest in Nifty 50?

To invest in Nifty 50 , individuals can buy index funds or exchange-traded funds (ETFs) that track the performance of the Nifty 50 index.

These funds can be purchased through a stockbroker or online trading platforms.

This will provide exposure to the 50 major stocks listed on the National Stock Exchange of India.

3. How is Nifty 50 different from the Sensex?

While both Nifty 50 and Sensex are stock market indices in India, they differ in their composition. Nifty 50 represents the top 50 stocks listed on the NSE, whereas the Sensex represents the 30 stocks listed on the Bombay Stock Exchange (BSE).

The selection criteria and weighting methodology are also different for these indices.

NIFTY 50 Performance: How much return has it generated?

Given the nature of the equity market, NIFTY 50 has witnessed many ups and downs since its inception in 1996. There have been years when the index witnessed a decline of 51%, and there have been years when the index climbed by more than 70%.

But on a long-term basis, the index has risen significantly, and in the last 15 years, the NIFTY index has delivered an annual average return of 13%.

To put this return in perspective, if you had invested Rs. 10,000 a month in the NIFTY 50 index for the last 15 years, you would have accumulated over Rs. 53 lakh by June 2021 at an annual average return of nearly 13%.

Absolute returns would not be a considerable amount for the first few years, if you choose to invest in the NIFTY 50.

Even after a few years initially, you might find your returns in in the negative.

But if you stay the course, the line of profits growing slowly might pick up pace due to the impact of compounding coupled with good returns.

How To Invest In NIFTY 50?

As we mentioned earlier, NIFTY 50 consists of the top companies in India, and if you buy the NIFTY 50, you become part-owner of these fantastic companies. Now, there are two ways to invest in NIFTY 50.

One, buy stocks directly in the same percentage as their weightage in NIFTY 50. The second option is to invest in Index Mutual Funds that track NIFTY 50.

These index Mutual Funds replicate the NIFTY 50, i.e., have a portfolio precisely like the index. So, a NIFTY 50 index fund will have the 50 stocks in the same proportion as the NIFTY 50, and all you need to do is invest whatever amount you want to invest in these funds.

Direct Stock Route or NIFTY 50 Index Funds: Which Is Better?

If you decide to invest directly in stocks depending on their weightage in the NIFTY 50, it will be an expensive, hectic, and complicated exercise.

If you invest directly in stocks, one of the significant challenges is the amount of money you require to replicate the NIFTY 50 index.

You cannot buy a fraction of stocks in India, which means that you must purchase a complete stock and not a part of it.

This means you will have to deploy a considerable amount of money to buy all the 50 stocks in NIFTY 50.

Let’s understand the challenges with an example. Suppose you want to invest Rs. 20,000 in NIFTY 50 every month. Now, one stock of Nestle would cost you more than Rs. 17,500, while one stock of Bajaj Finance would cost you over Rs. 6,000.

So, if you buy one stock for each of these two companies only, you would cross your monthly limit of Rs. 20,000. Imagine how much money you would require to buy all the stocks that comprise the NIFTY 50 index.

Besides vast amounts of money, you will also need to buy all the 50 stocks according to their actual weightage in the index and keep up with the weightage that changes daily.

This is a highly time-consuming exercise. Because the weightage of stocks varies with the rise or fall in their value, and you will need to make the changes in your portfolio daily to replicate the index.

A solution to all these challenges is to invest in index Mutual Funds simply.

How to invest in NIFTY 50 via Index Funds

Low Investment Amount

You can invest a smaller amount of money, as mutual Fund companies pool money from several investors for index funds.

You can start investing with as low as Rs. 500 a month through SIP.

You can also be a part-owner of all the 50 stocks of NIFTY 50 in the same proportion as the index.

Investment Flexibility

The flexibility of investing in NIFTY 50 via index funds is not limited to low investment amounts.

You can increase or decrease the amount you are investing at any time you want and by any amount you want. This makes the process of investing extraordinarily convenient and hassle-free.

Low-Cost Investment

NIFTY 50 index funds simply replicate the NIFTY 50 index. Thus, there is no need for a team of analysts and researchers to help the fund manager take tactical decisions.

Moreover, there is no active buying and selling of stocks. All these factors make the expense of managing NIFTY 50 index funds low. As a result, this translates into low fees for you as an investor.

No Need To Worry About Rebalancing when investing in NIFTY 50 fund

When you invest in a NIFTY 50 index fund, your money is managed by a fund manager who maintains it in the same exact proportion.

Any increase or decrease in the weightage of a stock is done by the fund manager.

So, you don’t need to worry about rebalancing or maintaining stocks in the same exact proportion as the NIFTY 50 index.

No Bias In Investing 

When you invest in a NIFTY 50 index fund, you follow an automated and rule-based investment methodology.

The fund manager has a defined mandate on which stocks to buy and how much to buy. This process removes the human bias while making investment decisions, and the fund can be an excellent addition to your portfolio.

Bottom Line

By investing in the NIFTY 50 index, you get to invest in 50 market leading companies. So you give yourself a great chance to accumulate enormous wealth in the long run.

Investing in the NIFTY 50 index can be convenient, easy, and cost-effective if you know how to invest.