One of India’s key broad-market indices, the Nifty 50, monitors the price changes of the 50 biggest businesses listed on the National Stock Exchange. It is frequently used by traders to assess the overall performance of the stock market.
The Nifty’s coverage of businesses in 14 various sectors is one of the main factors contributing to its reputation as a reliable gauge of stock market performance. As a result, an investor who places money in the Nifty 50 index has access to a diverse group of companies, which significantly lowers investment risk.
But how exactly should you make Nifty investments? Since it is an index, you cannot buy it straight up like corporate stock. There are other methods to use the index to make money off of its changes, though. In this essay, we’ll specifically address this.
Introduction The Nifty 50
If you are a frequent stock market investor, you have probably heard of the “Nifty 50.” Even if you regularly monitor the financial news, you have probably seen this phrase flash over your screen rather frequently. It’s one of the most crucial stock market measures to monitor.
One of India’s two leading indices is the Nifty 50. The top 50 large-cap corporations listed on the National Stock Exchange make up this group. It’s safe to state that the biggest and most well-known stocks in the nation had to be eliminated to join this index.
The top 50 Indian firms are what you invest in when you invest in the Nifty 50. In the long run, this enables you to develop and amass a sizable corpus. For instance, the Nifty 50 has increased nearly 14 times in the 25 years since its debut (1,107 points in 1996 to 15K in Feb, 2021). That is sufficient justification for investing in this index. An index, however, cannot be directly purchased, unlike stocks. Other strategies are needed to invest in the Nifty 50 index. This is the procedure.
Four investment options for the Nifty 50
1. Invest in stocks in a ratio that matches the index.
The Nifty 50 is made up of 50 various businesses from 13 different industries in the nation. Purchasing equities in the precise ratio of the Nifty 50 index is one strategy to invest in the index. This entails rebalancing your portfolio daily and recreating the weights. That procedure can be frantic, drawn-out, and challenging. Since you cannot buy shares in fractions and the exact weight of the stocks cannot be maintained as a result, that will also require a sizeable investment.
2. Invest in mutual fund indexes.
One of the best ways to invest in the Nifty 50 is through index mutual funds. Mutual fund programs called index funds precisely match the index weighting. The benefits of investing through index mutual funds include lower capital requirements, professional portfolio management, and a lack of ongoing portfolio supervision.
3. Select an ETF
Exchange-traded funds are investment instruments that mimic the characteristics of equities and mutual funds. They resemble a stock-filled mutual fund. They can be traded on exchanges like shares. There are many index exchange-traded funds (ETFs) that track the Nifty50 and produce returns in line with it.
4. Use derivatives to invest
Derivatives are the third way to gain exposure to the Nifty 50. Nifty 50 futures and options, which use the index as an underlying asset, are available for investment. Derivatives, however, do not actually deliver the shares that make up the index to you. You will instead pay cash to complete your contract. Derivative contracts, however, will give you exposure to the index. The contract life is only for a maximum of three months, so if you want to keep getting paid, you must leave your current job and find a new one.
How can I trade Nifty?
Mutual funds and derivatives are the two main avenues via which you can invest in the Nifty index. Let’s look more closely.
Purchasing Nifty through Derivatives
The Nifty index is the underlying asset for futures and options transactions. In essence, this indicates that the derivatives’ price movement is correlated with the index’s. The index cannot, however, be delivered at the expiration of its derivative contracts because it is not a stock. Instead, at the conclusion of the expiry, cash settlement will be required for all index derivatives.
Now that this idea has been clarified, let’s explore it further and attempt to comprehend how you can trade in Nifty using futures and option contracts.
Purchasing Nifty Futures Contracts to Invest
You can use the index futures contracts to benefit from market changes whether you have a bullish or negative opinion of the Nifty index. Consider the scenario where the Nifty is trading at 12,000 on November 1st, 2021. Since you have an optimistic outlook, you predict that the index will increase to almost 13,000 by the expiration.
All you have to do is pay 12,000 for the Nifty NOV FUT contract. You can easily square off your position if the index advances as predicted and reaches 13,000 before the contract expires.
In a similar vein, let’s say that you have a negative outlook and anticipate that the index will drop to roughly 11,000 by the expiry. In this instance, selling short the Nifty NOV FUT contract at 12,000 is all that is necessary. You may easily square off your position and profit if the index moves as predicted and drops below 12,000 before the contract expires.
Purchasing Nifty Stock With Options Contracts
Nifty options contracts can also be used to profit from market movements, just like futures. Let’s utilize the same illustration as before. Assume that on November 1st, 2021, the Nifty is trading at 12,000 at the moment. You have a bullish outlook and predict that the index will increase to about 13,000 by expiration.
As a result, you buy an index call option contract with the strike price of your choice. You can buy the Nifty Nov 13000 CE option contract because you anticipate the index to rise to about 13,000, to be more precise. As an alternative, you might buy an index call option contract with a strike price below the index’s current trading price. Your initial investment prices may increase because you would have to pay a greater premium for this. If the index rises as anticipated after you purchase a call option contract, all you need to do is square off your position.
Similar to this, you should buy a put option contract on the index with the strike price of your choice if you have a pessimistic outlook and believe the index will drop to roughly 11,000 by expiration. You can buy the Nifty Nov 11,000 PE option contract because you anticipate it to drop to about 11,000, to be more precise. You can easily square off your holdings and earn a return on your investment when the index declines.
The top 50 Indian companies listed on the National Stock Exchange are represented by the Nifty 50. Investing in the Nifty 50 can help you build long-term wealth through index investing.