Nifty Index Funds: What are they and can you invest in them directly?

What is a stock index?

A stock index serves as a measure for evaluating the performance of a stock market or a small subset of stocks over time. It reflects the price fluctuation of a group of equities compared to a predetermined benchmark. An index typically includes a set of stocks selected based on metrics such as their market capitalisation, industry or liquidity. 

What is the Nifty index?

Nifty is a popular stock market index introduced by the National Stock Exchange (NSE). It is the flagship index of the NSE. "National Stock Exchange" and "fifty" are combined to form the phrase "Nifty." It tracks the performance of 50 of the largest firms with the most liquid stocks across industries listed on the exchange. The index uses the market capitalisation of the constituent companies on 3 November 1995 set to 1000 as the base. 

What are Nifty Index Funds?

Index Funds are mutual funds that use a passive investment strategy and maintain their portfolios using available benchmark indices like Nifty or Sensex, unlike active investment, where a fund manager uses her own strategy to decide which stocks to invest in. Thus, the term "Nifty Index Funds" describes mutual fund schemes whose portfolios are created to mirror the Nifty index. The performance of these schemes is influenced by that of the underlying index, here the Nifty index, rather than the investment skills of the fund manager. 

Advantages of Nifty Index Funds

1. Diversification

By allocating investors' funds to shares of firms in various industrial sectors, the Nifty Index Funds help investors diversify their portfolios. This means that the value of investors' portfolios won't be significantly hurt even if one certain industry performs extremely poorly.

2. Low cost of investment

Nifty index funds are mutual fund schemes that are passively managed; fund managers do not actively participate in investment choices. Thus, they incur minimal management fees. As a result, the expense ratio is lower. Recent Securities and Exchange Board of India (SEBI) regulations state that mutual fund companies may charge this type of fund a maximum fee ratio of 1%. As investment costs are minimal, investors can enhance their income.

3. High returns in the long run

Since the Nifty and the Sensex have consistently performed well over time, the index funds have a higher likelihood of delivering similar returns over a long time horizon. Since its inception, the Nifty has grown more than 17 times, indicating that an early Nifty index fund investment would have given over 16-fold returns by now. 

4. No human bias

As investment in an index fund mirrors a given index, there is no room for bias on the part of the fund manager while investing.

5. High degree of flexibility

Just like most mutual funds, people have the option to invest a lump sum amount in index funds or to go with a systematic investment plan (SIP). SIP means that a fixed amount is allocated to an index fund scheme on a regular basis (monthly, quarterly, etc.) via the SIP approach. Through a SIP, one can begin investing in Nifty index funds with as little as Rs. 500 a month. 

How to invest in Nifty index funds directly?

With the emergence of several new digital platforms, investing in Nifty Index Funds has become exceedingly convenient. Interested investors can invest in a Nifty Index Fund online through the official website of a mutual fund, or they can use any of the new online platforms or mobile applications. First-time investors will have to complete a KYC (know-your-customer) process before they can start investing. 

Conclusion

Nifty index funds are flexible, low-cost mutual fund investments that track the Nifty index. By investing in Nifty index funds, one can easily diversify their equity investment across multiple sectors and reduce their risk exposure to a single sector. Moreover, since these index funds are passive investments, an investor does not have to spend a lot of their time managing their portfolio.