By: K Suhani Reddy
The Indian National Stock Exchange (NSE benchmark )'s index is known as NIFTY50. Previously, large-cap stocks on the US markets during the 1950s and 1960s were referred to as "buy only" or "NIFTY Fifty" equities because they were regarded as blue-chip securities. These equities only garnered "buy" ratings because they were regarded as economic pillars and had excellent fundamentals to back them up. Although the stock market was doing well, the 2008 financial crisis hit the stock market hard and caused it to fall much farther. After the crash, attempts to put it back together were made, although these efforts were not entirely successful.
With an ecosystem made up of exchange-traded funds (onshore and offshore), exchange-traded options at NSE, futures and options traded internationally at the SGX, and exchange-traded funds (onshore and offshore), the NIFTY 50 index has emerged as the largest single financial instrument in India. The most frequently traded contract globally is the NIFTY 50. NSE's leadership position is endorsed by polls from WFE, IOM, and FIA.
The NIFTY 50 index gives investment managers access to the Indian market through a single portfolio and encompasses 13 sectors of the Indian economy (as of 30 April 2021). Due to the growth of sectoral indices including NIFTY Bank, NIFTY IT, NIFTY Pharma, NIFTY SERV SECTOR, NIFTY Next 50, etc., the NIFTY 50 index's market capitalization share of the NSE decreased from 65% to 29% between 2008 and 2012. The NIFTY 50 Index places financial services at 39.47% weight, followed by energy at 15.31%, IT at 13.01%, consumer goods at 12.38%, automobiles at 6.11%, and agriculture at 0%.
The NIFTY 50 is a free float index that measures market capitalization. Initially, a comprehensive market capitalization technique was used to create the index. The calculation was updated to a free-float methodology on June 26, 2009. The National Stock Exchange Equity Market Segment had been in operation for a year at the time the NIFTY 50 index's base period began on November 3, 1995.
Nifty 50 is considered to be the best index in its area because:
1. Exposure to 50 blue-chip equities in a diverse basket:
The 50 largest Indian companies by market capitalization are included in the Nifty 50 index. As it mirrors the index, buying in a Nifty 50 ETF offers good stock and sector diversity for investors. In contrast to investing in a single firm, where market gyrations can have a larger negative influence on a stock's price than a basket of companies, a diversified portfolio lowers an investor's risk. The only prerequisite for investing in ETFs is that you need a Demat account.
2. The expense of purchasing an ETF is quite minimal:
The Nifty 50 ETF is a reasonably priced investment. Costs are low because the Nifty 50 index is passively tracked by the ETF, and there is little to no churn among the index's participants. Just 2-5 basis points (0.02-0.05%), or the amount that funds charge, constitute the expense ratio. One-tenth of a percentage point is referred to as a basis point.
3. Suitable for small Investments:
As a novice stock and equity investor, you could find some businesses' share prices to be excessively expensive in absolute terms. The share price of several stocks in the Nifty basket ranges from Rs 15,000 to Rs 30,000. If you decide to invest in these companies after conducting your own study, you will require a sizeable chunk of money. This sum can be too high and out of reach for new investors, especially those who are just starting out in their jobs and have little in the way of monthly or periodic excess.
Why is NIFTY 50 outperforming other indices?
Nifty has outperformed key global equity indices by a large margin in the current calendar year mainly because of the following reasons:
1. A strong corporate financial performance
Trade creditors, bondholders, investors, employees, and management are just a few of the diverse parties that make up a corporation. Each group is interested in keeping track of a company's financial results. How well a firm earns income, manages its assets, obligations, and the financial interests of its stakeholders and investors are determined by its financial performance. Form 10-K is a crucial record for disclosing corporate financial performance, and research analysts primarily rely on it. All publicly traded corporations are required by the Securities and Exchange Commission (SEC) to submit and make available this annual report. Its goal is to give stakeholders accurate, trustworthy data and information that gives a general picture of the business's financial health. Investors may learn a lot about a company's general health from its financial performance. It gives an overview of the company's financial situation and management's performance while also providing a glimpse into the future by indicating if operations and earnings are on track to increase as well as the prognosis for its shares.
2. Decent growth visibility
The dramatic decline in commodity prices would be a big positive element for Indian companies, therefore there is clear visibility for EPS growth for the Nifty moving forward. Although there may be some lag, as long as the demand environment is positive, the companies should be able to recover their margins, which had decreased due to strong raw material inflations.
3. Inflation and GDP data that are noticeably better than the rest of the globe
The market value of all finished products and services produced over a time period (quarterly or yearly) is measured by the gross domestic product (GDP), a key economic statistic. All private and public consumption, government spending, and investments are all included in the gross domestic output.
A sustained increase in the average price of goods and services over an extended period of time is referred to as inflation. Inflation reflects a decline in the acquiring influence per unit of money, a loss of material price in the medium of exchange and unit of account within the economy when prices rise because each unit of currency buys fewer goods and services. The annualized proportion change in an overall cost, typically the CPI, over time is known as the inflation rate, and it is a key indicator of price inflation. Deflation is the antithesis of inflation. Continuous inflation fluctuates between positive and negative trends.
India now accounts for 14.5% of the MSCI EM Index, up from 8% previously. India's profit pool share is rising which should result in India receiving its fair share of investment inflows.
Hence, for good reason, NIFTY 50 is one of the names you will hear the most while talking about the markets or engaging in any market-related talks. Therefore, Nifty 50 is definitely the most reliable in terms of investing.
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