Nifty 50 Index Fund

A Nifty Index Fund is a mutual fund that mirrors the Nifty 50 index by investing in the stocks of companies listed in the index. Its objective is to achieve returns similar to the Nifty 50 Index through a passive investment approach.
What is Nifty 50 Index Fund
3 min
25-June-2024

Most mutual funds are designed to outperform the market. However, there is a certain subsection of funds known as index funds that only aim to replicate the performance of the overall market. Among the many index funds available in India, very few enjoy the level of popularity of Nifty 50 index funds. Wondering what a Nifty 50 index fund is and the things you need to keep in mind when investing in one? Continue reading to find out.

What is a Nifty 50 index fund?

A Nifty 50 index fund is a type of mutual fund whose primary objective is to track and replicate the performance of the Nifty 50 index. The Nifty 50 is a broad market index that comprises 50 of the largest and most liquid Indian companies listed on the National Stock Exchange (NSE).

To ensure that the index fund achieves its objective, fund managers invest in the same stocks as the Nifty 50 index at the same weightage and proportion. As the index value changes, so does the value of the index fund.

Unlike other types of mutual funds, a Nifty 50 mutual fund is passively managed, meaning that the involvement of fund managers is very minimal. Once the fund is constructed to mirror the constituents of the Nifty 50 index, the fund managers do not make any changes or adjustments to the portfolio unnecessarily. The only time its portfolio is rebalanced is if there has been any change in the constituents in the index.

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Advantages of investing in Nifty 50 index funds

Investing in Nifty 50 funds offers several advantages. Knowing what they are can help you decide if these funds are the right investment option for you. Let us explore some of the key advantages.

  1. Diversified market exposure
    The Nifty 50 is a broad-market index that consists of fundamentally strong companies across various key sectors and industries of the Indian economy. Investing in an index fund based on the Nifty 50 index provides an unmatched level of diversified market exposure. Moreover, such comprehensive diversification reduces stock-specific risks and prevents the fund from getting impacted due to the underperformance of a few stocks.
  2. Expense Ratio
    The expense ratio is the fee that the Asset Management Company (AMC) levies annually for managing and operating a fund. The higher the ratio is, the lower your returns are likely to be. Since Nifty 50 funds are passively managed with very minimal involvement of the fund managers, the Total Expense Ratio (TER) tends to be considerably lower than actively managed funds. This makes the funds one of the best cost-effective investment options available in India.
  3. Consistent performance
    Outperforming the overall market consistently year-over-year can be very challenging. In fact, only a handful of actively managed funds tend to outperform the market consistently. Since Nifty 50 index funds only aim to replicate the performance of the benchmark index, their performance tends to be more consistent over time.

Things to consider before investing in Nifty 50 index funds

If you are planning to invest in Nifty 50 index funds, here are a few factors that you must consider before you make a decision.

  • Investment objectives and horizon
    Understanding your investment goals and horizon will help determine whether investing in Nifty 50 index funds aligns with your financial goals. Since Nifty 50 funds have historically performed well in the long term, consider investing in them only if you are willing to stay invested for a long term.
  • Risk tolerance
    Although Nifty 50 mutual funds offer comprehensive diversification, they are still susceptible to market risks and volatility. Therefore, it is advisable to invest in them only if you are comfortable with taking on a high level of risk and enduring market fluctuations.
  • Expense ratio
    Lower expense ratios can have a significant positive impact on your returns over time. Therefore, make sure to compare mutual funds to determine the ones with competitive expense ratios and consider investing in them.
  • Tracking error
    The tracking error is a metric that indicates how closely a Nifty 50 index fund mirrors the performance of the benchmark. A lower tracking error indicates better replication of the index's performance.

Taxation of gains from a Nifty 50 index mutual fund

The gains from a Nifty 50 mutual fund are subject to capital gains tax. If the period of holding is less than 12 months, the gains are classified as short-term capital gains and are taxed at a flat rate of 15%.

On the other hand, if the holding period is more than 12 months, the gains are classified as long-term capital gains and are taxed at a flat rate of 10%. However, long-term capital gains are taxed only if they exceed Rs. 1 lakh in a financial year.

Conclusion

Nifty 50 index funds provide a straightforward and cost-effective way to gain exposure to some of the top companies listed on the NSE. However, despite the various advantages, Nifty 50 funds are still subject to market risks and volatility. Fortunately, you can mitigate volatility to a certain extent by making an SIP investment in the fund.

Unsure of which Nifty 50 index fund to choose? The Bajaj Finserv Mutual Fund Platform can help. With over 1,000 mutual fund schemes from leading AMCs to choose from and a dedicated tool to compare different funds, you can quickly determine the one that aligns best with your investment objectives and risk tolerance.

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Frequently asked questions

How does a Nifty 50 index fund work?
A Nifty 50 index fund aims to replicate the performance of its benchmark index, which is the Nifty 50. It achieves this by investing in the same constituents as the benchmark at the same weightage and proportion. This ensures that the value of the index fund moves in tandem with the index.
Which is the best Nifty 50 index fund?
There is no single ‘best’ Nifty 50 index fund. The ideal fund for you depends on various factors, such as the expense ratios, tracking errors, the fund manager’s expertise and your preferences.
Is investing in a Nifty 50 index fund risky?
Although Nifty 50 funds offer the benefit of diversification, they are still subject to market risks. Factors such as the prevailing economic conditions, market volatility and company-specific risks can all affect the performance of these funds. However, compared to investments in individual stocks, index funds are generally considered to be less risky.
Is it advisable to invest in a Nifty 50 mutual fund?
Yes. Investing in Nifty 50 index funds is advisable if you are seeking cost-effective exposure to the top companies listed on the National Stock Exchange (NSE). These funds offer a host of benefits ranging from diversification to long-term growth potential, making them suitable for both beginner and experienced investors. However, it is essential to keep in mind that the Nifty 50 funds are subject to market risks and you should consider investing in them only if you have a high tolerance for risk.
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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.