In our lives, we often come across the term Nifty50 – be it in newspapers or television channels that talk about Sensex today. In fact, you’d even hear experts talk about Nifty50 while analyzing the stocks and the market. So, it’s natural for beginners like yourself to wonder what this Nifty50 is that you keep reading/ hearing about!
In this article, we will talk about what Nifty50 is, how stocks are selected to be a part of Nifty50, and why Nifty50 stocks are good for long-term investments.
What is Nifty50: An introduction
The Nifty50’s value is determined through the free float market capitalization method.
To compute the Nifty50 index value, we divide the current market capitalization of all the stocks within the Nifty50 by the market capitalization during the base period.
The current market capitalization is a weighted sum of the market capitalization of all 50 companies. This calculation involves multiplying the free float shares by the market price per share. Free float shares represent the total outstanding shares, excluding those held by promoters, government entities, trusts, and the like.
The base date for Nifty50 is set as November 3, 1995, with an initial base value of 1000 and a corresponding base market capitalization of INR 2.06 Trillion.
How are stocks selected for Nifty50?
Here are some of the rules and criteria upon which the structure of the NIFTY 50 is established.
- Universe: To qualify for inclusion in the Nifty50, a company must first be listed on the National Stock Exchange (NSE). Furthermore, the company’s stocks should be actively traded in the NSE’s Futures & Options segment. Companies that are not listed and traded on the NSE are ineligible for inclusion in the Nifty50.
- Basic Selection: Among the companies listed on the NSE, the top 50 large-cap companies are chosen based on their free-float market capitalization. Free-float market capitalization is computed by multiplying a company’s stock price by the number of shares readily available in the market. For example, if a company has 100,000 shares available for trading, each priced at INR 30, then the company’s market capitalization would be INR 30 lakhs.
- Liquidity: Liquidity is another critical factor in the selection of stocks for the Nifty50. Essentially, it means that stocks included in the Nifty50 index should be easy to buy and sell, with high trading volumes.
- Rebalancing and Reconstitution: The composition of the Nifty50 is not static. The index undergoes a semi-annual rebalancing in June and December each year. During this process, the Nifty50 removes stocks that have experienced a decline in market capitalization or have been suspended or delisted. These removed stocks are then replaced by emerging stocks that have seen an increase in market capitalization. This rebalancing process automatically enhances the Nifty50’s exposure to emerging stocks and sectors.
Considering the dynamics of the equity market, you’ll find that Nifty50 has experienced numerous fluctuations since its establishment in 1996. Some years, the index saw a decrease of 51%, while in other years, it surged by over 70%. However, when you assess its performance over the long term, you’ll notice a substantial overall increase. Over the past 15 years, the Nifty index has consistently provided investors like you and me with an average annual return of 13%.
Why invest in Nifty50 for the long term?
When it comes to long-term investments, investing in Nifty50 makes sense. Remember, time equals money, and long-term investments truly emphasize this. Your short-term investment objectives in Nifty50 might seem promising, but their success rates can be somewhat lower.
With long-term investments in Nifty50 stocks, you not only have the opportunity to generate substantial profits but also the time to rectify any investment errors that may occur. This is particularly beneficial if you are new to investing in Sensex today or if you have misunderstood certain facts, which is pretty common among people.
Investing in Nifty50 stocks can be highly advantageous for beginners, and here’s why you should consider it.
- Good Return Potential: When you invest in the Nifty50 stocks, you’re putting your money into India’s leading and most reputable companies. They have a history of delivering impressive returns and are poised to continue doing so in the future. For newcomers like you, these companies can be a source of fruitful investments.
- Lower Volatility: Nifty50 companies are well-established biggies capable of weathering short-term market fluctuations and making comebacks. By including Nifty50 stocks in your portfolio, you can effectively reduce the ups and downs in your investments, lowering the risk of substantial losses.
- Trusted and Leading Companies: The Nifty50 index is home to India’s largest and most liquid firms listed on the NSE. These companies are leaders in their respective sectors, known for their strong business fundamentals and consistent growth. By investing in them, you can gain a sense of security and confidence in your investment choices.
- Liquidity: Unlike small-cap companies, Nifty50 stocks are large and established, ensuring that you have access to the desired liquidity. They are actively traded, providing you with the necessary flexibility when buying or selling your investments.
- Lower Investment Costs: Nifty50 index funds mimic the Nifty50 index, eliminating the need for a team of analysts to guide the fund manager’s decisions. This translates to reduced active trading of stocks, ultimately lowering the cost of managing the fund. As a result, you, as an investor, will pay lower fees, allowing you to keep more of your returns.
When discussing the Nifty 50 index, a significant portion of the investment community tends to focus primarily on the short term. This trend can be largely attributed to the consistent growth in the trading volume of Nifty 50 index options and futures, indicating a preference for index trading among investors. Nevertheless, it’s worth noting that the Nifty 50 stocks can also serve as a viable long-term investment option, particularly for individuals who may not possess the financial expertise needed to carefully select the right companies for their investment portfolio.
Ultimately, what counts is your understanding of your finances and your choice of an investment avenue that guarantees favorable returns in the long run. You can consider investing in established company stocks from Nifty50 to ensure that your investment is entrusted to capable hands. Survey the landscape, observe current events, and base your decisions on verifiable facts and reliable information.