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What is NIFTY 50? How can you invest in NIFTY 50?

What is NIFTY 50? How can you invest in NIFTY 50?

Introduction

The Nifty 50 was first introduced in the late 1990s by the National stock exchange. It is an abbreviation of the National Stock Exchange Fifty and a combination of “National” and “Fifty”. It is an equity benchmark index. A benchmark index is a group of securities used for judging the performance of other stocks or securities in the market.The index tracksthe financial performance of a particular group of stocks.The Nifty 50 is owned by India Index Services and Products (IISL), a subsidiary of the National Stock Exchange. IISL’s core product is the index.

The Nifty 50 is a broad index of the National stock exchange (NSE).Out of the many stocks traded in the National stock exchange, the Nifty 50 consists of the mostliquid Indian stocks. These stocks are all from blue-chip companies from many different sectors.Hence, the index is considered to be an accurate reflection of the overall health Indian stock market.The stocks on the index must be from India and listed and traded on the NSE.

The stocks on the Nifty 50 are not constant. If the performance of one stock deteriorates, it is removed, and new stock is added. The fluctuations of the price of the market price of the stocks indicate the movement of the market. You can compare the price levels of different stocks in the Nifty during different periods.

Computation of Nifty 50 index:

Nifty 50is computed based on thefree-float market capitalization-weighted method. The index level shows the total market value of all the stocks in the index relative to a base periodof 3 November 1995.

To understand how the value is calculated, you need to understand a few terms 

  1. Market cap
  2. Free-float market cap
  3. Investible weight factor
  4. Weighted free-float market cap

Market cap (capitalization) is the total value of a company’s shares. It is calculated by the product of the shares outstanding of a particular stock and the current price per stock.

Free float market capitalization is the total market value of all the available shares for public trading. The below formula calculates it

= Market cap* Investible weight factor (IWF)

Investible weight factor (IWF):

It is a unit that shows how much of a company’s total shares is available to the investors for trading. Higher the IWF, the more significant the number of shares available for trading.

Let us see an example to understand how the value is computed

Let us take a hypothetical example of three stocks A, B and C, from the Nifty 50 index. 

Stocks Market cap (current) IWF Free-float market cap (current) Weight  Weighted free-float market cap
Stock A 10,000 0.7 7,000 0.58 4,060
Stock B 15,000 0.8 12,000 0.47 5,640
Stock C   5,000 0.6 3,000 0.60 1,800
Current market value 11,400

If the market cap of the stocks and the IWF change, then the weight of the index value also changes. 

Stocks Market cap (current) IWF Free-float market cap (current) Weight  Weighted free-float market cap
Stock A 12,000 0.95 11,400 0.58 6,612.00
Stock B 13,500 0.75 10,125 0.47 4758.75
Stock C   7,500 0.8   6,000 0.60 3,600.00
Current market value 14,970.75

Now that the current market value is calculated, the index value of Nifty 50 can easily be calculated

Index value = (Current market value/ base market capital) *1000

Base market capital is the weighted aggregate market cap of all 50 companies in the base period, 3 November 1995. The base value of the index on that date is taken as 1000, and the base capital stands at ₹ 2.06 trillion.

How can you invest in NIFTY 50?

To invest in the Nifty 50, you need to have a trading and a demat account.

Since the Nifty 50 is an index, you cannot purchase it directly. There are two ways to invest in this index:

  • Investing in Nifty via derivatives

A derivative is a financial instrument that derives its value from another asset. The index is the asset for derivative contracts like futures and options. The price movements of these contracts are linked to that of the index. When you trade in these derivatives, you can make money out of the gains in the index.

  • Investing through future contracts:

Assume that the nifty is trading at₹17,000 today. You expect the value of the index to rise to around ₹18,000. You can purchase the Nifty futures contracts at ₹17,000, and if the index does rise, you can enjoy a profit.

  • Investing through options contracts:

With the same example above, you can invest in a call option contract of the index with a strike price of ₹13,000. Once the index moves according to your expectation, you can enjoy a profit.

  • Investing in Nifty via mutual funds

Mutual funds have the same portfolio of stocks that are present in the Nifty 50 index. ICICI direct offers you a chance to invest in these funds that are cost-effective, offer diversification and provide the investor a chance of good returns.This will also give you a broad market exposure. Once you log in to ICICI direct, navigate to the mutual fund section and choose a Nifty Index fund.

Conclusion:

Investing in the Nifty 50 via mutual funds provides you with a chance of investing in all the 51 components of the index. Before selecting a fund, it is better to have a good analysis of the fund’s performance and track record. You also have to go through all the scheme-related documents carefully before investing in the fund.

Disclaimer:

ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. – ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai – 400020, India, Tel No : 022 – 2288 2460, 022 – 2288 2470. AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

Please note, Mutual Fund related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein mentioned are solely for informational and educational purpose.

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