What is Nifty 50 ETF Funds? Benefits & How to Invest?

Posted On: 23 February 2024

New investors can often be daunted by the enormous variety of mutual fund schemes to choose from. A relatively easier and straightforward way of investing is through exchange traded funds. Enter the Nifty 50 ETF – an exchange-traded fund representing the blue-chip giants of the Indian economy. This fund allows you to tap into the collective might of these industry leaders in a single, convenient package.

In this article, we will look into the world of Nifty 50 ETFs, explaining what they are, how to invest in them, and the potential benefits they offer.

Table of contents

What are Exchange Traded Funds (ETFs)?
What is the Nifty 50 Index?
What is the Nifty 50 ETF?
How does Nifty 50 ETF compare to Nifty 50 index funds?
Why to invest in Nifty 50 ETF Fund
Benefits of investing in Nifty 50 ETF Fund
4 tips to invest in Nifty 50 ETF Funds
Tracking error and its impact on returns
How to invest in Nifty 50 ETF funds: Step-by-step guide
Minimum investment and account requirements
Tax benefits and implications of investing in Nifty 50 ETFs
How to Invest via SIP (Systematic Investment Plan)
Things to consider before investing in Nifty 50 ETF

What are Exchange Traded Funds (ETFs)?

Before talking more about the Nifty fifty ETF, let’s find out what are ETF funds? ETFs are mutual funds that usually track a specific index and can be traded on exchanges like stocks. Since ETFs can be bought or sold on the exchange during market hours, they offer high liquidity and flexibility to investors. Moreover, Exchange Traded Funds (ETFs) are structured to mirror the performance of an index, subject to tracking error. Therefore, they are passively managed and hence more cost effective compared to actively managed funds.

What is the Nifty 50 Index?

The Nifty 50 Index is a benchmark equity index of the National Stock Exchange of India (NSE). It represents the performance of 50 largest companies by market capitalisation listed on the NSE. These companies operate across multiple sectors, including banking, information technology, energy, consumer goods, pharmaceuticals, and automobiles, providing diversified representation of the Indian equity market.

The index is calculated using the free-float market capitalisation weighted method. This means companies with a higher free-float market value have a greater influence on index movements. The composition of the Nifty 50 is reviewed periodically to ensure it continues to reflect current market structure and liquidity conditions.

Key characteristics of the Nifty 50 Index include:

It reflects the performance of large cap stocks that are actively traded on the NSE.
It is widely used as a benchmark for equity mutual funds, index funds, and exchange traded funds.
It serves as a reference point for assessing broader market trends and investor sentiment.

What is the Nifty 50 ETF?

A Nifty 50 ETF is a passively managed investment fund that mirrors the performance of the Nifty 50 index, subject to tracking error. This index comprises the 50 largest and most liquid stocks listed on the National Stock Exchange (NSE) of India. They represent around 65% of the total market capitalisation. By investing in a Nifty 50 ETF, you essentially gain diversified exposure to leading blue-chip companies across various sectors like banking, finance, technology, and infrastructure.

How does Nifty 50 ETF compare to Nifty 50 index funds?

Nifty 50 ETFs and Nifty 50 index funds are both passive investment options that aim to replicate the performance of the Nifty 50 Index. While their underlying objective and portfolio composition are similar, they differ in structure, mode of access, and operational aspects, which may influence suitability for different investors.

A Nifty 50 ETF is listed and traded on stock exchanges like an equity share. Investors buy and sell ETF units during market hours at prevailing market prices, which may be at a slight premium or discount to the underlying net asset value (NAV). ETFs require a demat and trading account. Liquidity and trading volumes play an important role in determining ease of entry and exit.

Nifty 50 index funds, on the other hand, are open-ended mutual fund schemes. Units are bought or redeemed directly with the asset management company at the applicable NAV, which is calculated at the end of each trading day. These funds do not require a demat account and are commonly accessed through SIPs or lump sum investments.

Some key points of comparison include:

Access and transactions: ETFs are exchange-traded intraday, while index funds transact at end-of-day NAV.
Costs: ETFs generally have lower expense ratios, but brokerage and other transaction costs may apply. Index funds have slightly higher expense ratios but no brokerage costs.
Investment approach: Index funds may be more convenient for systematic investing, while ETFs may suit investors comfortable with market-linked trading.

Why invest in Nifty 50 ETF Fund

Investing in a Nifty 50 ETF Fund offers several benefits. As a passive investment vehicle, it mirrors the performance of India's benchmark Nifty 50 index, providing investors with diversified exposure to the country's top blue-chip companies. Here are some reasons to invest in Nifty 50 ETF:

Diversification: Gain exposure to a diversified basket of blue-chip companies in a single investment, spreading your risk and mitigating individual stock volatility.
Convenience and liquidity: ETFs trade like regular stocks on exchanges, offering high liquidity and ease of buying and selling.
Lower costs: Compared to investing in actively managed funds, ETF fees are relatively lower, reducing your overall investment expenses.
Long-term growth potential: Over time, the Indian economy and its leading companies are expected to grow, potentially leading to capital appreciation in your Nifty 50 ETF investment.
Regular income options: Some Nifty 50 ETFs invest in dividend-paying stocks, providing a potentially steady stream of income alongside to the fund investing in these stocks.

Benefits of investing in Nifty 50 ETF Fund

Investing in Nifty 50 ETFs offers several advantages:

Diversification: Instant diversification across 50 of India's largest companies, reducing individual stock risks.
Exposure to top companies: Gain access to well-established companies driving India's economy.
Cost-effectiveness: Lower expense ratios compared to actively managed funds.
Liquidity and transparency: Easy to buy/sell on stock exchanges with clear holdings.
Ease of investment: Simple access through online platforms or brokerage accounts.
Long-term growth potential: Opportunity to benefit from India’s economic growth.

4 tips to invest in Nifty 50 ETF Funds

Here are a few Nifty 50 fund investment tips to help you get started on your Nifty Fifty ETF investment journey:

Align your investment goals: First and foremost, you must align your Nifty Fifty ETF investment with your financial goals. It will help you decide how much you want to invest, whether to invest a lumpsum or start a SIP, and how long you want to hold the investment among other things.
Compare the fund size and trading volume: When you start looking for Nifty 50 ETF investment tips, you will realise that you need to compare many Nifty Fifty ETFs based on different factors to choose the one suitable for you. One of the most important factors is the size of the fund. A large fund size indicates higher investor interest and, consequently, higher liquidity. A larger trade volume also affirms that the fund is in demand.
Factor in the expenses: Nifty Fifty ETFs, like all other Exchange-traded Funds, can be traded on the stock exchange like stocks. The transaction and other charges levied on the purchase and sale of ETFs on the stock market are borne by the investor. The expense ratio of the fund is another cost that can eat into the returns of your Nifty 50 ETF.
Keep an eye on the tracking error: Nifty ETF returns depend on the performance of the stocks of 50 companies comprising Nifty 50. This affects the returns offered by the fund. Tracking error is the difference in the performance of the index and the performance of the fund. The lower the value, the better the fund is at tracking the index.

Tracking error and its impact on returns

Tracking error measures how consistently a passive fund’s returns track those of its benchmark index over time. Tracking error arises due to several operational and structural factors. While the objective of passive funds is to mirror index returns, exact replication is not always possible in practice. As a result, small deviations may occur over time.

Some common contributors to tracking error include:

Expense ratio: Fund expenses reduce returns and create a gap between index performance and fund performance.
Cash holdings: Funds may hold small cash balances for liquidity or redemption purposes, which may lead to minor deviations.
Rebalancing timing: Indices are periodically rebalanced. Delays or differences in execution may affect fund returns.
Corporate actions and inflows or outflows: Dividend treatment, corporate actions, and large investor flows may impact replication efficiency.

The impact of tracking error on returns becomes more relevant over longer holding periods. Even relatively small differences, when compounded over time, may affect potential returns compared to the benchmark. However, tracking error does not indicate future performance or fund quality in isolation.

How to invest in Nifty 50 ETF funds: Step-by-step guide

Investing in a Nifty 50 ETF is a relatively straightforward process, similar to buying any other stock. However, unlike other mutual funds, you must have a demat account to invest in ETFs. Here's how to invest in Nifty 50 ETF:

Choose a broker: Open a demat account with a stockbroker who offers access to ETFs.
Select your Nifty 50 ETF: Research and compare different Nifty 50 ETFs offered by various fund houses. Consider factors like expense ratio.
Place your order: Decide on the amount you want to invest and place a buy order through your broker's platform. You can choose between market orders (immediate execution) or limit orders (execution at a specific price).
Hold or sell: Monitor your investment and decide when to sell based on your financial goals and market conditions. Remember, long-term investment horizons are generally recommended for ETFs.

This is a brief guide for those wondering 'how to invest in Nifty ETF', 'how to invest in Nifty 50 directly', 'how to invest in Nifty 50 ETF', 'how to invest in Nifty 50 index' or ‘how to invest in Nifty index’.

Minimum investment and account requirements

To invest in Nifty 50 ETFs, an investor must have a demat account to hold units in electronic form. A trading account is also required to place buy or sell orders during market hours. These accounts are typically linked to a bank account to facilitate settlement of transactions. There is generally no prescribed minimum lot size, other than the price of one unit, although brokerage firms may have their own minimum order values or charges.

Tax benefits and implications of investing in Nifty 50 ETFs

Nifty 50 exchange traded funds (ETFs) are classified as equity-oriented mutual funds under Indian tax laws, as they invest more than 65% of their portfolio in equity and equity-related instruments of large cap companies. The taxation of these ETFs is aligned with the rules applicable to equity mutual funds and depends primarily on the holding period.

Capital gains taxation applies as follows:

Short-term capital gains (STCG): If Nifty 50 ETF units are sold within 12 months from the date of purchase, the gains are treated as short-term capital gains. As per the latest provisions applicable after the 2024 Union Budget, STCG on equity-oriented funds is taxed at 20%, along with applicable surcharge and cess.
Long-term capital gains (LTCG): If the holding period exceeds 12 months, gains are classified as long-term capital gains. LTCG is taxed at 12.5% on gains exceeding ₹1.25 lakh in a financial year. Gains up to this threshold are exempt.

How to Invest via SIP (Systematic Investment Plan)

Do you want to know how to invest in Nifty 50 SIP? Well, Systematic Investment Plan (SIPs) offer a convenient and disciplined way to invest in Nifty 50 ETFs. You can set up a recurring investment where a fixed amount is automatically deducted from your bank account and invested in your chosen ETF at regular intervals, like monthly or quarterly. This method promotes potential long-term wealth creation through rupee-cost averaging and compounding, making it suitable for beginners. A SIP calculator can help you determine the right investment amount to reach your financial goals effectively.

Things to consider before investing in Nifty 50 ETF

Before diving into Nifty 50 ETFs, consider several factors. Assess your investment goals, risk tolerance, and time horizon. Learn more:

Risk tolerance: Nifty 50 ETFs are subject to market fluctuations, so understand your risk tolerance before investing.

Investment horizon: Nifty 50 ETFs are suited for long-term goals (5+ years) to ride out market ups and downs.

Seek professional advice: Consult a financial advisor if you're unsure about your investment strategy or need personalized guidance. You can also use mutual fund tools such as lump sum SIP calculator to estimate potential returns and accordingly finetune your investment strategy.

Conclusion

Nifty 50 ETFs offer a suitable way to capture the potential of the Indian stock market with diversification, convenience, and cost-effectiveness. By understanding potential benefits and limitations and choosing the right Nifty 50 ETF, you can leverage this instrument to build a diversified portfolio. Also, understanding how to do SIP in Nifty 50 and adopting a disciplined approach can optimise the long-term growth potential. Remember, thorough research, proper risk management, and seeking professional guidance when needed are the keys to navigating the market with confidence and potentially achieving your financial goals.

FAQs

Is it good to invest in Nifty ETFs?

Investing in Nifty ETFs can be a smart choice for many investors. It offers diversified exposure to top companies at a low cost, mirroring the Nifty 50 index's performance. However, suitability depends on individual goals, risk tolerance, and market conditions. Conduct thorough research and consider consulting a financial advisor before investing.

How do you benefit from ETF?

ETFs offer various benefits, including diversification, low costs, and flexibility. They provide exposure to a basket of assets, reducing individual stock risk. ETFs offer cost-effective investment options. Additionally, they trade like stocks, offering liquidity and trading opportunities.

How do you profit from ETF?

You can profit from ETFs through capital appreciation and dividends. If the ETF's underlying assets increase in value, the ETF's share price rises, allowing you to sell at a profit. Dividends earned from the underlying assets are typically distributed to ETF shareholders, providing additional income.

How to invest in Bajaj Finserv Nifty 50 ETF?

You can invest in the Bajaj Finserv Nifty50 ETF through your Demat account. To learn more about the scheme, visit the Bajaj Finserv Nifty50 ETF page on www.bajajamc.com

What is the role of tracking error in Nifty Fifty ETFs?

Nifty 50 is an index that comprises the top 50 companies, in terms of market capitalisation, in India listed on the National Stock Exchange (NSE). The smaller the value of the tracking error, the better. A lower tracking error value indicates how well the fund can replicate the Nifty 50 index.

Can I start an SIP for a Nifty 50 ETF?

Yes, some fund houses offer SIPs for Nifty 50 ETFs. If you want to invest in a Nifty 50 ETF with a Systematic Investment Plan (SIP), you need to open a demat account and set the investment amount, investment frequency and duration with your broker. You will receive the fund units in your demat account. The Net Asset Value (NAV) of the ETF is calculated at the end of each trading day. You can hold or trade your units at any time on a trading day.

Can I invest in Nifty 50 ETFs through my bank?

You may be able to invest in Nifty 50 ETFs through your bank if it provides demat and trading services directly or through a linked brokerage platform. In such cases, the bank facilitates access, while ETF transactions are executed on the stock exchange.
Availability depends on whether the bank offers integrated demat and trading facilities, its association with a brokerage entity, and the exchange access provided to investors.

How can I track the performance of my Nifty 50 ETF?

The performance of a Nifty 50 ETF can be tracked using multiple reference points. These include the ETF’s daily net asset value (NAV) disclosed by the fund house, as well as the market price at which the ETF trades on the stock exchange. In addition, investors may refer to the returns of the Nifty 50 index, as published by the NSE, to understand broader index movement.

Is investing in Nifty 50 ETFs safe for beginners?

Nifty 50 ETFs are designed to track the performance of the Nifty 50 index, which represents large and established companies listed in India. This makes them relatively simple to understand compared to more complex investment products. However, like all equity investments, Nifty 50 ETFs are subject to market risks, and their value can fluctuate based on market movements.

How does SIP investment reduce risk in Nifty 50 ETFs?

SIP investment in Nifty 50 ETFs involves investing a fixed amount at regular intervals. This approach may average purchase costs over market cycles, potentially reducing timing risk. However, SIPs do not eliminate market risk and returns remain linked to equity market movements.

What expenses are associated with Nifty 50 ETFs?

Expenses associated with Nifty 50 ETFs include expense ratio charged by the fund, brokerage costs for buying and selling, bid-ask spreads, and demat account charges.

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