Saturday, June 22, 2024

Why invest in Nifty 50 ETF

etf                                     33,100
exchange traded fund                                     33,100
invest in etf                                       1,000


The large cap segment of our equity market is much more efficient than the mid and small cap segment because of high institutional investor ownership, high trading volumes in cash and derivatives market, more research coverage, etc. Price discovery is much more efficient in large cap stocks compared to mid/small caps. Mutual fund or exchange traded fund Investors looking to invest in large cap companies may invest through Nifty 50 ETF.

Why invest in Nifty 50 ETF?

  • Nifty 50 ETF comprises of the 50 largest companies in India by market capitalization. The companies in the Nifty 50 index are market leaders in their respective industries.
  • Stocks in Nifty 50 ETF or exchange traded fund has high percentage of ownership of the institutional investors, both domestic as well as foreign. Therefore, these large cap stocks are the most actively traded in the stock market and thus their liquidity is also very high.
  • Government of India has allowed The Employee Provident Fund Organization (EPFO) to invest in equities, thus EPFO has been regularly investing in Nifty 50 ETFs. Since 2018, the EPFO allocation to equities has increased to 15%. Currently EPFO invests 50% of its equity allocation in Nifty 50 ETF and the balance in Sensex ETFs. The regular investment flows from EPFO means support to Nifty index even when the stock markets are volatile.
  • The Nifty 50 index has a strong track record of wealth creation. Rs 10,000 invested in Nifty 50 TRI would have grown 20 times in the last 20 years by generating a CAGR of 16% (Source: Advisorkhoj MF Research – as on 30th June 2022).
  • Since Nifty 50 ETF is a passive fund, the total expense ratio (TER) of this exchange traded fund is much lower than that of actively managed mutual funds. For the same level of performance of the underlying portfolio, chances are that funds with lower expense (TER) will outperform actively managed mutual  fund schemes which have higher TERs
  • There is no unsystematic risk in NIFTY 50 exchange traded fund because it tracks the market index. Actively managed mutual funds, on the other hand, may have unsystematic risks because they have to be overweight / underweight on certain stocks in order to beat the index returns. So actively managed mutual fund investment have both, unsystematic and systematic or market risks, while ETFs are subject only to market risks.

Now, let us see who should invest in Nifty 50 ETF.

  • Investors who are looking for decent capital growth over long investment horizons.
  • Investors who have high risk appetites and understand the risk of investing in equities or equity mutual funds.
  • Investors who have minimum 5 to 7 years of investment horizon and patience to remain invested even when the markets are volatile.
  • Investors who have demat and share trading account as ETF units can be held only in demat accounts.

Investors who are not looking to invest through mutual fund SIP. You cannot invest in an ETF through SIP. You can invest through SIP only in Index funds or regular mutual fund schemes.

Carlie Porterfield
Carlie Porterfield
I am a Texas native covering breaking news out of New York City. I was previously an editorial assistant at the Forbes London bureau. Follow me on Twitter @reporterfield

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