Invest in Nifty Index Funds - What are Nifty Index Funds?

Published On: 30-Jul-2020

Investors may choose to invest in the equity markets through two primary investment strategies – active investing and passive investing. Active investing refers to the active selection of stocks in the portfolio depending upon company fundamentals and other parameters. In contrast, passive investing refers to tracking a benchmark index and replicating its composition in the portfolio. When a scheme is actively managed, the fund manager actively decides in which stock to invest and in what proportion to invest. On the hand when a scheme adopts a passive investing strategy; the fund manager needs to passively replicate the portfolio of underlying index it aims to replicate and this is done by buying or selling the stocks which  are forming part of an index and that to almost in same proportion. As such, passive investing helps investors mitigate the unsystematic risk in their investment strategy. Within the passive investment strategy, investors need to make an investment decision to choose the underlying benchmark index. 

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Generally, broad market indices like Nifty 50 etc. are preferred choice which helps in giving the asset class exposure. Nifty 50, is a basket of 50 large & liquid companies from various sectors and is primarily considered to be synonymous with the Indian equity markets. Since Nifty 50 Index is not a security by itself, the investors must purchase all the constituent stocks with similar weightage to have a similar investment exposure. Such a strategy calls for a higher amount of capital. Further, an investor needs to continuously track the underlying index for any changes. Here, an Index Fund which is replicating Nifty 50 Index, can be of great help. This article aims to discuss Nifty Index Funds in detail.

What is a Nifty Index Fund?

A nifty Index fund is a mutual fund scheme that tracks the Nifty 50 index by investing in stocks of companies comprising Nifty 50 and endeavor to achieve return equivalent to Nifty 50 Index by “passive” investment strategy. Being a passive investment product, the fund manager is mandated to track the index. Any changes in the constitution need to be appropriately changed in the fund portfolio, as and when such changes are made effective. As the fund follows a passive investing strategy, management charges, and consequently, Total Expense Ratio (TER) tends to be lower than active mutual fund schemes. As such, index funds emerge as a low-cost investment product for investors. This also helps the investors generate investment returns in synchronization with the benchmark Index for the portfolio.

Investing in Nifty Index Fund

One may invest in the Nifty Index Fund by following the same procedure as one would adopt to invest in other mutual fund schemes. The investors may hold the units of such index funds in investor folio as well as in demat form. The investment and redemption transactions in index funds are executed by mutual funds at the prevailing NAV (Net Asset Value). 

Taxation for Nifty Index Fund

Being an index fund, at least 95% of its net assets are invested in the index constituents of the Nifty 50 index. Thus, these funds are classified as equity-oriented mutual funds for tax purposes and accordingly equity mutual fund taxation is applicable. 

With Nifty 50 index funds, investors may aim to benefit from the wealth creation potential of equity markets by participating in the broader market.