Nifty 50 Index Fund

How do Nifty 50 Index Mutual Funds work?

Since the Nifty 50 Index fund tracks the Nifty 50 Index, these funds invest in all the stocks in the same proportion as the index. So, when you invest in a Nifty 50 Index fund your money is pooled in with other investors and allocated across the stocks in the index.

Index funds are passive funds, which means the fund manager does not actively select stocks but only adjusts the portfolio according to the index’s additions or removals. Since the mutual fund closely mirrors the performance of the Nifty 50 Index, the returns will also be similar.

What are the benefits of investing in a Nifty 50 Index Fund?

The following are the advantages of investing in the Nifty 50 Index Fund:

1. Low Cost

The cost that you need to bear to invest your money in Nifty 50 index funds is very low. Since the fund managers do not require any analysts or researchers to make decisions regarding the purchase or selling of stocks, no additional cost is necessary. This is why index funds charge some of the lowest expense ratios among mutual funds. 

2. Diversified Portfolio

Nifty 50 index funds invest in the top companies in India. This means your money is invested across diversified sectors and companies, helping you get exposure to the country's top businesses. It also reduces the risk involved in your portfolio, making it suitable for first-time investors.

3. Low Risk

Nifty index funds intrinsically carry lower risk than actively managed funds. These funds imitate the performance of the Nifty 50 index, which includes 50 well-known and reliable corporations from a variety of industries. The index's diversification serves to disperse risk, mitigating the impact of bad individual stock performance.

Should I invest in Nifty 50 Index Funds?

Active funds and index funds follow different investment strategies, and it's important to understand their key traits before investing. Index funds aren’t suited for everyone, they require patience and a long-term perspective. Here’s who should consider investing in them:

Long-term Investor

Investors who embody patience and are looking to build wealth over a longer period should invest in Index funds. Since they are linked to the broader market, their primary objective is to beat market returns.

Stock Market Beginner

New investors who lack expertise in selecting individual stocks should consider investing in an Index Fund. Since the Nifty 50 comprises India’s top 50 companies and the Nifty 50 Index Fund replicates its performance, investors can gain exposure to these stocks without the need for individual analysis.

Passive Investor

When investors prefer a hands-off investment strategy where they do not have to pick and monitor stocks, index funds are an ideal choice. 

How to choose the best Nifty 50 Index Fund?

While all Index funds mirror an index, their performance differs based on tracking error and expense ratio. Let’s look at the factors you need to consider when selecting a Nifty 50 Index fund:

1. Tracking Error:

Tracking error tells you how the returns of an index are different from its benchmark index A low tracking error represents that an index accurately mirrors a benchmark.

2. Expense Ratio

All Index funds are passively managed funds, however, the expense ratio they charge may differ on the basis of the asset management company. The lower the expense ratio, the more it adds to your returns. Hence, choose a fund with a low expense ratio.

Are there any risks when investing in Nifty 50 Index Fund?

Index funds have now become a popular investment choice and while it has some key advantages, investing in these funds is also followed by some risks:

1. Market Risks

Since a Nifty 50 Index Fund directly tracks the Nifty 50, it is equally exposed to market fluctuations. If the index rises, so does the fund's value, but if the Nifty 50 declines, the fund’s returns will also drop. Meaning, that the fund experiences the same ups and downs as the market.

2. Concentration Risk

The Nifty 50 is dominated by large-cap companies, making the index fund vulnerable to sector-specific risks. If a major sector or a few top companies underperform, it can significantly impact the fund’s overall returns.

3. Tracking Error

Since a Nifty 50 Index Fund aims to replicate the Nifty 50, its performance should ideally match the index. However, due to factors like fund expenses and trade execution delays, there can be slight deviations in returns, which results in tracking errors. A high tracking error means the fund is not accurately mirroring the index, which can impact overall returns.

Difference between Nifty 50 & Nifty 50 TRI

The benchmark for Nifty 50 index funds is ‘Nifty 50 TRI’. Let’s understand how nifty 50 is different from nifty 50 TRI. TRI stands for ‘Total Returns Index’. NIFTY TRI factors in the dividends received from the companies in this index.

While NIFTY 50 only displays the change in price for the index, meaning it only accounts for capital gains in the Index. NIFTY 50 TRI depicts capital appreciation and the dividends investors would earn. In conclusion, NIFTY 50 TRI serves as a more accurate benchmark to assess returns from the index.

How have Nifty 50 Index Funds performed over the years?

Funds that mirror the Nifty 50 Index have given an average 3-year return of 12.87%, 5-year return of 14.92%, and 10-year return of 10.49%. When looking at returns, one must also look at how the price-to-earnings ratio for Nifty 50 has moved over the years, but first let’s understand why P/E Ratio is important in Nifty 50.

P/E Ratio of Nifty 50 Index

P/E Ratio stands for Price-to-earnings ratio P/E ratio is used to understand the valuation of a stock or in this case index. It is calculated by dividing the current index price with the earning per share. For example, if the P/E of Nifty 50 is 20, this would mean that an investor is willing to pay ₹20 for every ₹1 of earnings generated. The P/E of Nifty 50 helps us get an overall picture of how investors perceive the valuation of the index.