Why Invest in Nifty ETF
What is ETF?
Exchange Traded Fund or ETF is a passive scheme which tracks a market benchmark index e.g. Nifty. ETFs invest in basket of stocks that replicate the market index which it is tracking. Unlike mutual funds, units of ETFs can be traded (bought or sold) on stock exchanges just like shares of companies. You need a Demat and trading account to invest in ETFs.
Benefits of ETFs
- Unlike actively managed funds, ETFs do not aim to beat the index; they simply track the market index. Since ETFs track an index, they do not have any unsystematic risk. Actively managed funds, on the other hand, have unsystematic risks because they are overweight / underweight on certain stocks relative to the index. If the stocks that active funds are overweight or underperform, then the fund will underperform the index.
- Since ETF funds invest in a basket of stocks that replicate the index, the fund management and research effort for ETFs is less compared to active funds. As a result, the total expense ratios (TERs) or cost of ETFs is much lower than active funds.
Different types of ETFs
There are ETFs of different asset classes e.g. equity, debt, gold, silver etc. In this article, we will discuss one of the most popular ETFs in the market – the Nifty ETF.
What is Nifty?
Nifty 50, commonly referred to as the Nifty, is the market benchmark index that comprises 50 largest companies by market capitalization in the National Stock Exchange (NSE). Nifty and Sensex are the two the leading benchmark indices of Indian equity market and reflects the performance of the market as a whole. Financial instruments with Nifty as the underlying e.g. Nifty ETF, Nifty derivatives (i.e. Nifty futures, Nifty options) etc, are the most actively traded securities in the stock market.
Nifty ETF funds invest in a basket of securities which replicate the Nifty 50 Index. Nifty ETFs are among the most popular and most actively traded ETFs in the stock market. After the Government allowed Employee Provident Fund (EPF) to invest in equities, a large part of EPF investments in equities goes to Nifty 50 ETFs.
Why invest in Nifty 50 ETF?
- Nifty is the leading equity index in India. Nifty 50 represents more than 58% of the average market cap of all stocks listed on the NSE (as on 31st January, source AMFI). These stocks are the most actively traded and liquid stocks in the index.
- Nifty stocks, also known as blue-chip stocks, are the largest and most reputed companies in India, with long track records. Historical data shows that blue-chip stocks are less volatile relative to the broader market. They have lesser downside risks in corrections or bear markets.
- Nifty, comprising of 50 stocks, is more diversified than the Sensex, which comprises of just 30 stocks.
- Liquidity is an important consideration in ETFs since retail investors can sell their ETF holdings only in the stock exchanges. Nifty ETFs are the most actively traded / liquid ETFs since institutional investors (FIIs and DIIs) are the major investors in Nifty ETFs.
- Unlike actively managed large cap funds, there is no unsystematic risk in Nifty 50 ETFs.
- The TER of Nifty 50 ETF funds is much lower than actively managed equity funds. Over the last few years Nifty ETFs have generally outperformed large cap funds
Who should invest in Nifty ETFs?
- Investors looking for capital appreciation over long investment horizon
- Investors who have high to very high risk appetites
- Investors who have minimum 5 year investment tenures
- Investors who have demat and trading accounts for investing in Nifty ETF