Stock / Share Market
by 5paisa Research Team Last Updated: 2022-09-22T13:10:00+05:30

How to Invest in Nifty?

Investing in the Stock Market is surely not everyone’s cup of tea, but if your investments stick around for a long period, you can have minimal exposure to risk and maximum growth and profitability output from these investments. Pouring your hard-earned savings into Nifty Index Investments can reward you handsomely. You don’t have to be a stock market expert to make these sound investments. Instead, you simply need to go through this comprehensive guide, that tells you all about this fund, and how you can get the best outcome from it.

What is a Nifty index fund?

A Nifty index comprises the stocks of various companies. When you invest in this mutual fund, your money is invested in the stocks of these companies that form an integral part of the Nifty index. You are not investing in stocks when you invest in the Nifty fund, but your investment is poured into a mutual fund. The components of the Nifty fund mirror the Nifty 50 index and follows the performance of the index irrespective of the market scenario.

These mutual funds provide you with massive risk diversification and broad exposure to the market. The fund manager selects the stocks based on certain criteria. There could be a possibility of the NAV – net Asset Value of the fund mitigating, despite the uprise in the financial markets. This is because of the underperformance of a few companies who are a part of the Fund portfolio.

In a Nifty index fund, the underperformance of a few companies gets balanced out by the outperforming companies, which, in turn, reduces the risk you are exposed to. This ensures stable returns and a fair degree of safety for the investor. 

The average annual performance of the Nifty 50 Index in India from financial years 2011 to 2018 at 9,870.4, to an increase from the previous year where the value was 8,421.2.

Advantages of Investment in a Nifty index fund

Below are some of the benefits of Nifty Index funds over single-stock and more traditional mutual funds.

1. Lower risk

Nifty Index Fund stocks are identical to Nifty 50 Index stocks, allowing you to enjoy broader market exposure, effectively diversify your portfolio and mitigate associated risks. As it operates in almost every major industry and sector in the market, poor performance in a particular sector does not have any significant impact on it.

2.  Stable Returns

The profits earned here are more stable and the potential for future growth is endless with these funds.

3. Bias Elimination

There is no emotional bias when you are investing in a Nifty index fund. The selection of the stock portfolio is completely objective, as this fund mirrors the Nifty index.

How to Invest in Nifty - Trading Tips & Strategy

Nifty 50 is one of India's broadest benchmark indicators, tracking price fluctuations of the 50 largest listed companies on the National Stock Exchange. It is widely used by traders to measure the performance of the entire stock market. Nifty is considered an impressive indicator of the stock market performance as it targets companies in 14 different sectors. As a result, as an investor, you can invest capital in the Nifty 50 Index making diversified investments all at once, significantly reducing investment risk. You cannot invest in the Nifty Index Fund directly like company stock; instead, you will have to follow a procedure that will be discussed here.

Investing in Nifty via Derivatives

Sophisticated derivative contracts such as futures and options are index-based, which indicates that derivative price movements are linked to index price movements. When you start trading these derivatives, you can earn profit from price fluctuations in the index. You must know that the index is not a stock and will not be accepted after the derivative contract expires. All the index derivatives should be settled in cash at the end of the period.

Investing in Nifty Through Futures Contracts

If the Nifty Index is either bullish or bearish, you can take advantage of price fluctuations with index futures contracts.

For example, let’s say that the Nifty is currently trading at 12,000 on May 1, 2020. You're bullish, so you expect the index to rise to about 13,000 by the time it expires. You simply need to buy the contract for 12,000. If the index reaches 13,000 before the contract expires, you can end up making a profit.

On the other hand, if you have a bearish sentiment, and you expect the index to go down to 11,000 by the time it expires. You simply need to shorten the 12,000 contracts. If the index falls below 12,000 before the contract expires, you can again make a profit.

Investing in Nifty Through Options Contracts

You can take advantage of price fluctuations with nifty options contracts, just as you used to use futures. Considering the same example as discussed, with a bullish sentiment, you can purchase an index call option contract at the strike price you choose. The index is expected to rise to around 13,000, so you can buy Nifty option contracts. Alternatively, you can purchase an index call option contract at an exercise price that is lower than the index's currency transaction price. For that, you will have to pay higher premiums, which may enhance your initial investment cost. If the index works according to your expectations when you buy a call options contract, all you have to do is split your position for a significant profit.

If you have the bearish sentiment and expect the index to drop to about 11,000 levels by the time it expires, you need to buy an index and put an options contract at the strike price of your choice. Specifically, purchasing a Nifty 11,000 option contract will help you enjoy the rewards of your investment when the index goes down.

Investing in Nifty via mutual funds

Mutual funds, like the index funds, contain the same portfolio of stocks contained in indexes such as Nifty. These funds can excellently track the performance of the index, allowing you as an investor to participate in the index's value creation process. These index funds as compared to other mutual funds are more affordable, offer better diversification, and are more likely to offer better returns to investors. By investing in a Nifty Index Fund, you can effectively invest in all 50 components of the Nifty 50 Index and gain a wide range of market exposures.

How to Invest in Nifty Index Fund

Here is the step-by-step procedure which tells you how you can invest in a Nifty index fund directly.

Step 1: Visit the website of one of the leading stockbrokers and get registered for a trading and Demat account. This is mandatory to start investing in the Nifty Index Fund.

Step 2: Fill the application and follow the process as suggested to open your trading and Demat account. This will be an application form that will ask you about your personal and professional details. You will also have to upload important documents to complete the KYC process like proof of identity (Aadhar Card and PAN Card), proof of age, proof of income, and proof of address.

Step 3: After thorough verification of your documents, your application for opening a trading and Demat account will be processed by the stockbroker, as soon as your application is filled and you have submitted the required proofs.

Step 4: After the application process is completed, a unique username and password will be generated for you. You need to use this exclusive information to log in to the trading platform

Step 5: Once you are logged in, you can reach the mutual fund section and look for the Nifty index fund. You must perform a sound comparison of the various funds available for investment. Do a comprehensive analysis of the track record of each fund, and past performances, before you make the final decision.

Step 6: Go through the entire scheme-related documents.

Step 7:After taking the final decision, you can select the Nifty index fund, you want to invest in. You can either buy units of the fund by making a lump sum payment, or you can invest in the SIP (Systematic Investment Plan).

Conclusion

Investing in a performing Nifty Index Fund can enhance the likelihood of realizing your financial objectives in a much shorter period. If you are not stock-market savvy, you don’t have to worry about managing the fund. It will be passively and professionally managed by your fund manager. You only need to invest in it, sit back and enjoy the fruits of pouring in your savings in this fund.

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