Indian investors are increasingly opting to invest in equities. For this, they have been using the passive route with vigour.
This trend can be gauged from the rise in folio counts seen in index funds and ETFs over the past three years.
However, the journey for many first-time equity investors may not be a smooth one.
That is because they could be confounded when it comes to choosing the right way of gaining exposure to equities as the ability to research and take a deep dive is very limited if one is thinking beyond just short-term trading.
The Indian equity market has grown exponentially over the last decade. So, if you are an investor looking to partake in the India growth story via equities, then making an ETF such as the Nifty 50 ETF a part of your portfolio may be a prudent decision.
What is Nifty50?
Nifty50 is the prominent equity index in India, consisting of 50 of the largest Indian companies in terms of market capitalisation that are listed on the National Stock Exchange.
The index is widely regarded as a good barometer of the Indian stock market. It is often used by investors as a benchmark to measure returns due to its wide diversification in its constituents across sectors.
The index has delivered a CAGR of 11.45 percent in the last five years and 11.25 percent since its inception in 1996.
If you are looking to invest in Indian equities, then the Nifty50 is a great place to start as it gives exposure to a wide variety of Indian companies and diversification across sectors without picking and choosing individual stocks.
Also, the index captures some of the best large-cap companies available in the listed universe and companies which are representative of the sectors they are operating in.
What is Nifty50 ETF?
A Nifty50 ETF is a passive mutual fund that replicates the Nifty50 index in terms of constituents and proportion of weights, without any deviation.
As a result, the return an investor gets is also akin to that of the index returns minus expenses.
Following are some of the distinct advantages of the offering for investors:
1. Being an ETF, it can be purchased or sold in multiples of one unit. One unit of ICICI Prudential’s Nifty50 ETF is available at ₹191.42, which is a relatively small amount. Yet it gives exposure to all the 50 stocks in the Nifty.
On the other hand, if one were to buy a single share of each of the 50 names in the Nifty50 index, the investor would have to spend several thousand (data as on Jan 27, 2023).
One can buy and sell units of ETFs, just like a stock, at any point of time during the trading hours of a day as they are listed on the stock exchanges. This makes the transaction very convenient.
2. Starting to invest with Nifty50 ETF can be a stepping stone to understanding the nitty-gritty of equity investing. The only thing an investor needs is a demat account and a trading account.
Once an investor is comfortable and well-versed with market dynamics, he/she can consider transitioning to sophisticated instruments that are actively managed.
3. Since Nifty50 ETF is a passive fund, the fund management costs are very low as there is no requirement for the fund manager’s acumen or research.
For example, ICICI Prudential Nifty 50 ETF has an expense ratio of 0.05 percent, making it one of the cheapest ways to gain exposure to some of the best companies in the large-cap space.
4. For those without a demat account, may consider investing in Nifty50-based index funds.
The only difference between the two is that an index fund is not traded on the exchange and has a slightly higher expense ratio compared to ETF.
Considering these factors, if you are an investor looking to invest in an ETF tracking the NSE's top 50 companies, then the Nifty50 ETF is what you should look at.
While doing so, remember to check the expense ratio, tracking error, and trading volumes (to ensure liquidity) before making a choice.
(The author of this article is the head of ETF sales at ICICI Prudential AMC)
Disclaimer: The views and recommendations given in this article are those of the author. These do not represent the views of MintGenie.