When it comes to wealth creation, investment in the stock market sits right at the top. Your investments can reward you handsomely if you’re willing to stay invested for the long run. Nevertheless, there’s also an inherent risk that you must contend with. If the financial market performs poorly, you could lose a significant portion of your capital. To reduce exposure to market risk, one of the best strategies is to invest in a Nifty index fund. If you’re wondering what it is and how to do Nifty index investment, here’s some valuable information that can help clear things out for you.
What is a Nifty index fund?
A Nifty index fund is essentially a mutual fund wherein your money is invested in the stocks of the companies that feature in the Nifty index. When you invest in a Nifty index fund, you’re essentially investing in a mutual fund instead of a stock. The Nifty index fund is designed in such a way that the components of the fund match exactly with the companies in the Nifty 50 index. As the fund mirrors the Nifty 50 index, it follows the performance of the index irrespective of the market scenario.
With traditional mutual funds, the fund manager cherry-picks the stocks based on certain criteria. However, these mutual funds rarely provide you with broad market exposure or risk diversification. As a result, there is still the possibility of the Net Asset Value (NAV) going down, even when the financial markets are doing well, due to the underperformance of a few select companies in the fund portfolio.
This scenario is unlikely to happen when you invest in a Nifty index fund, as the underperformance of a few stocks ultimately gets balanced out by other outperforming stocks. A Nifty index fund drastically reduces the amount of risk that you’re exposed to and provides you with a degree of safety by giving you stable returns in the long run.
Advantages of investment in a Nifty index fund
Some of the advantages that a Nifty index fund has over individual stocks and more traditional mutual funds are explained below.
Since the stocks in the Nifty index fund are identical to that of the Nifty 50 index, you get to enjoy wider market exposure, thereby effectively diversifying your portfolio and reducing the risk involved. Since you are exposed to almost all the major industries and sectors in the market, your returns do not get affected greatly even if a particular sector performs poorly.
The returns that you get may be higher with respect to individual stocks or industry specific stocks, but they may not be stable due to market fluctuations. However, that’s not the case when you invest in a Nifty index fund. The returns you obtain here are more stable and the potential for future growth is unlimited with these funds.
Elimination of bias
Whether you’re a fund manager or an individual investor, it is hard to put aside your emotions when picking stocks for investment. With a Nifty index fund, there is absolutely no emotional bias and the selection of the stock portfolio is completely objective, since this fund is designed to mirror the Nifty index.
How to invest in a Nifty index fund directly
The following step-by-step procedure will give you a broad idea of how to invest in a Nifty index fund directly.
Step 1: Firstly, you require a trading and demat account to invest in a Nifty index fund. If you don’t already have one, you can open these accounts by visiting the website of your favorite stockbroker.
Step 2: Follow the procedure to open a trading and demat account as listed by your stockbroker. This would require you to fill in an online application form. Additionally, you may also be asked to upload scanned copies of Know Your Customer (KYC) documents such as a proof of identity, proof of residence, and income proof.
Step 3: Once your KYC verification is successful, your application for opening a trading and demat account will be processed by your stockbroker.
Step 4: Upon successful completion of the application process, a unique user ID and password will be shared with you. You can use this to login to your stockbroker’s trading platform.
Step 5: After logging into the trading platform, navigate to the mutual fund section and choose a Nifty index fund. Before selecting a Nifty index fund, it is a good idea to do a comprehensive analysis on its performance and track record. Also, ensure that you read through the entire scheme-related documents.
Step 6: Once you’ve chosen a Nifty index fund, you can either choose to start a Systematic Investment Plan (SIP) or buy units of the fund directly with a single, lump-sum payment.
By following the steps above, you can invest in a Nifty index fund in no time. Investing in index funds can increase the likelihood of your funds performing well over the long term, thereby allowing you to realize your financial goals and needs in a much shorter span of time. Furthermore, since these funds are passively managed, you don’t have to spend a lot of your time monitoring your portfolio. Now that you have a better idea of how to do Nifty index investment, you only need to invest in them, sit back, and enjoy the returns.