Trading Tips and Strategies to Invest in NIFTY 50

If you want to invest in the stock market and have a diversified portfolio, one of the smartest strategies could be to invest in the NIFTY 50.

The NIFTY 50 is abenchmark stock index in Indiacomposed of the 50 largest companies listed on the National Stock Exchange. It is a combination of words “National Stock Exchange” and “fifty”. NIFTY 50 is one of two primary stock indices used to gauge market performance in the country.

Why Should You Invest in NIFTY 50?

• Diversification:One of the tenets of smart investing is having a diversified portfolio of investments. The NIFTY 50 index is made up of 50 different stocks across 14 sectors of the market. Therefore, it provides an adequate diversification that can, in turn, reduce the amount of risk an investor takes.
• Benchmark of the market:Since it consists of a wide range of blue-chip stocks from different sectors and some of the largest companies in the country, it is representative of the stock market in India. Returns will be commensurate with how the market performs.
• Pre-defined portfolio:An investor who chooses to invest in the NIFTY 50 has a pre-set portfolio of stocks to invest in, which the market and experts have already vetted. These stocks have performed well in the market and are expected to provide reasonable returns in the future. As an investor, you will be spared the trouble of undertaking deep research about which stocks to invest in.

How to Invest in NIFTY 50?

There are three main ways to invest in the NIFTY 50 index:

• Direct investment
• Via mutual funds
• Via derivatives

Direct Investment

One way to invest in the index is to directly purchase the shares of the companies that are its constituents. That will involve active investing on your part. You can invest according to the weighted averages of the index or purchase the stocks in any proportion you like. That is one of the most time-consuming and effort-intensive ways to invest in the index. It will also involve considerable capital since you will have to purchase whole stocks.

Via Mutual Funds

The following way to invest in NIFTY 50, and perhaps one of the easiest ways, is to invest in NIFTY 50 index funds. These mutual fund schemesinvest in the exact proportion of the stock’s position in the index. Fund managers manage the investment of index mutual funds. When the weightage of stock changes in the index, then the manager will change the investment accordingly. Investing through index funds is cost-effective, time-efficient and ensures the right allocations since it is managed by a professional.

Via Derivatives

Derivatives are financial instruments that get their value from an underlying asset. Derivatives function as a contract between two parties who agree to settle on a date in the future and effectively profit based on price movements of the underlying asset.

When you invest in a derivative linked to the NIFTY 50, the value of the contract will depend upon the price movement of the index. Two derivatives can be used to trade in the index:

• NIFTY Futures:A futures contract is an agreement between two parties, i.e. the buyer and the seller, for buying and selling as an asset on a future date. NIFTY Futures will allow you to trade the index to your benefit depending upon the view of the market that you have.
  For instance, if you think that the value of the NIFTYindex will go up, you can purchase a futures contract on the present value and then square off your position when the value goes up. This way, you can enjoy a profit.
  Now, if you expect the value of the index to fall, you can short-sell the futures contract. That means that you agree to sell the contract at a pre-determined price. When the index value falls, you can purchase at that rate and then sell it at the higher rate decided, thereby making a profit.
• NIFTY Options: Options contracts are financial instruments that give the buyer the right but not the obligation to trade an asset. The buyer will have to pay a premium to enjoy this benefit.
  If you have a bullish view of the NIFTY 50 index, you can purchase a call option at a specific strike price. This option gives you the right but not the obligation to buy the index at a particular price. If the cost of the index moves up, you can exercise your call option to purchase it at a lower price, then sell it in the market at the higher price and pocket the difference.

If you have a bearish view on the index, you can purchase a put option. A put option gives you the right to sell but not the obligation to sell at a specific price. The strategy here is the exact opposite of what happens with a call option.

Conclusion

Investing in the NIFTY 50 is a tried and tested way of making money in the stock market. You can choose a strategy that works best for you. If you have the time and expertise to invest directly, it can save you the expense of paying a fund manager or a premium on derivatives. However, if you want to invest with minimum hassle, index mutual funds are the way to go.

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