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Investors may choose to invest in equity markets through two primary investment strategies: active and passive. Active investing refers to the active selection of stocks in the portfolio depending on 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 decides 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 simply replicate the underlying index portfolio. This is done by buying or selling the stocks which are forming part of an index, in the same proportion. As such, passive investing helps investors mitigate unsystematic risk in their investment strategy. Within the passive investment strategy, investors need to make an investment decision to choose the underlying benchmark index.
Generally, broad market indices like Nifty 50, BSE Sensex etc., are referred to as indicators of market movement. Nifty 50 is a basket of the top 50 companies in terms of market capitalisation. They are spread across various sectors. Since the 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 track the underlying index for any changes continuously. Here, an Index Fund replicating Nifty 50 Index can be of great help. This article aims to discuss Nifty Index Funds in detail.
Nifty Index Funds Meaning: 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. It endeavours to achieve returns equivalent to the Nifty 50 Index by a “passive” investment strategy. The fund manager is mandated to track the index; any changes in the index 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 in active mutual fund schemes. As such, index funds emerge as a low-cost investment product for investors. This also helps investors generate investment nifty index fund returns in synchronisation with the benchmark index for the portfolio.
Investing in a Nifty Index Fund
One may invest in the Nifty Index Fund 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).
Things to Consider Before Investing in Nifty Index Funds
- Index fund performance - Index funds may be considered to be less prone to equity-related volatility as they map an index. Investors may choose to have a mix of actively managed funds and index funds as index funds may lose their value during market downturn.
- Investment cost – Usually, the expense ratio of nifty index funds may be lower than actively managed funds because they are passively managed, and the fund manager is not required to make active investment decisions.
- Return on investment – Index funds are ideal for investors looking to invest for the long term as they may take more time to generate returns when compared to other funds.
Taxation for Nifty Index Mutual 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.
Disclaimer:
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Nifty Index Funds are mutual funds that replicate the performance of the Nifty 50 index. They offer low-cost diversification and are ideal for passive investors who want market-matching returns.
