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Should You Invest in Nifty ETF?

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nifty etf



What is Nifty?

Nifty 50, commonly referred to as the Nifty, is the market benchmark index that comprises 50 largest companies by market capitalization in the National Stock Exchange (NSE). Market capitalization (market cap) of a company is defined as the current market prices multiplied by the number of shares outstanding. The weights of the Nifty 50 index constituents are based on free float market cap methodology. Free float market cap means the market cap of shares not held by the promoters, related parties, management etc. In free float market cap based index, the companies which have the largest free float market cap will have higher weights in the index. Nifty reflects the combined share price and total returns (price appreciation and income) performance of the 50 stocks comprising the index. It is the leading benchmark index of Indian equity market and reflects the performance of the market as a whole. Financial instruments with Nifty as the underlying e.g. Nifty ETF, Nifty derivatives (F&O) etc. are among the most actively traded securities in the stock market.

What are ETFs?

ETF are passive schemes which track market indices. ETFs are listed on stock exchanges and are traded like shares of companies. You need a Demat and trading account to invest in ETFs. Please note that ETFs do not try to beat the index returns which their counterpart active funds aim to do; ETF simply track the market index. As a result, ETFs do not have any unsystematic risk. Also, the Total Expense Ratios (TERs) or cost of ETFs is much lower than actively managed mutual funds.

Nifty 50 ETF

Nifty 50 ETFs are exchange traded fund which track the Nifty 50 index. Nifty ETFs invest in a basket of securities which replicate the Nifty 50 Index. Nifty ETFs are among the most popular and most actively traded ETFs in the stock market. After the Government allowed Employee Provident Fund to invest in equities, a large part of EPF investments in equities goes to Nifty 50 ETFs.

Why invest in Nifty 50 ETF?

·      Nifty 50 Index is the leading equity index in India. Nifty 50 represents more than 57% of the average market cap of all stocks listed on the NSE (as on 30th June 2022, source AMFI). These stocks are the most actively traded and liquid stocks in the index.

·      Nifty 50 stocks, also known as blue-chip stocks, are the largest and most reputed companies in India, with long track records. These companies are often the market share leaders in their respective industry sectors.

·      Historical data shows that blue-chip stocks are less volatile relative to the broader market (e.g. midcaps, small caps etc.). They have lesser downside risks in corrections or bear markets.

·      A large percentage of AUM of Nifty ETF is institutional investors (including EPF). This makes Nifty ETFs one of the most actively traded and liquid ETFs.

·      Unlike actively managed equity funds, there is no unsystematic risk in Nifty 50 ETFs since the ETFs aim to replicate the index.

·      The TER of Nifty 50 ETFs is much lower than actively managed equity funds

Who should invest in Nifty 50 ETFs?

·      Investors looking for capital appreciation by investing in blue-chip stocks

·      Investors with moderately high to high risk appetites

·      Investors with minimum 5 year investment tenures

Investors should consult with their financial advisors / stockbrokers, if Nifty 50 ETFs are suitable for their investment needs


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