Many investors, new to equities, often wonder about how to get started on the right investment path. The draw towards equities is usually the prospect of making inflation-beating returns over the long-term. And reaching all our goals does require an element of equity exposure, be it via mutual funds, direct stocks or a combination of these two options.
But if you are new to equities and want to make a start with stocks directly, making a decision on the right company to invest in is not easy – you need to understand a company’s financials, business prospects, valuations, industry dynamics, market conditions etc. Here’s where the Nifty 50 ETF (exchange-traded fund) comes into the picture. An ETF, which tracks a specific index, is traded like stocks on the exchanges but is offered by a mutual fund house. You can buy and sell units of ETFs from the exchanges during market hours.
In this regard, the Nifty 50 ETF is one of the optimal starting points for first-time stock investors and in general for those beginning their equities journey.
Exposure to a diversified basket of 50 blue-chip stocks
The Nifty 50 index comprises the largest Indian companies in terms of market capitalisation. Therefore, investing in a Nifty 50 ETF provides excellent diversification across stocks and sectors for an investor as it replicates the index.
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A diversified portfolio reduces the risk for an investor, which is not the case with investing in a single stock, where market gyrations can impact the price of a stock more adversely than a basket of companies. Also, the returns from investments in the Nifty 50 ETF would mimic the movements in the underlying index. The only requirement is that you need a Demat account for investing in ETFs.
The cost of investing in an ETF is very low
Investing in the Nifty 50 ETF is relatively inexpensive. Since the ETF tracks the Nifty 50 index passively and there is limited or no churn in the index constituents, costs are low. The expense ratio, or in other words what funds charge, is just 2-5 basis points (0.02-0.05%). One basis point is one-hundredth of a percentage point.
Suitable even for those with small investments
As a newbie investor in equities and stocks, you may find the prices of shares of some companies to be quite pricey in absolute terms. There are stocks within the Nifty basket that trade at anywhere from Rs 15,000 to Rs 30,000 per share. You will need to have substantial amounts to invest in these companies – assuming you choose to invest in such stocks after your own analysis. For fresh investors, especially those in the very early stages of their careers, with limited monthly or periodic surplus, this amount may be too large and out of reach.
For such investors, the Nifty 50 ETF would give exposure even with a very small amount. You can buy one unit of an ETF for a few hundred rupees. For example, the ICICI Prudential Nifty 50 ETF trades at a price of Rs 185 on the NSE. You can thus invest as little as Rs 500-1,000 and buy units of the Nifty 50 ETF from the exchange. You can even make systematic investments every month. By doing so you will buy at all market levels and would average the costs of your investments.
Great starting point to explore other equity-related options
By investing in the Nifty 50 ETF, you can start understanding the market dynamics over the years, without taking too many risks early on. When you familiarise yourself with the various factors driving the markets, you can explore small- and mid-cap stocks or mutual funds based on your risk appetite, goals, time horizon and investible surplus.
The tracking error – a measure of the deviation of fund returns from that of the underlying index – of the ICICI Prudential Nifty 50 ETF is 0.03%, which is among the lowest in the Nifty 50 ETF universe. In general, the lower the number, the better.
Thus, the Nifty 50 ETF can be your first investment as you begin your investment journey!
The author is Head - ETF Sales, ICICI Prudential AMC (Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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I'm an investment expert with a deep understanding of equities, financial markets, and investment strategies. My knowledge is derived from years of hands-on experience, extensive research, and a commitment to staying abreast of the latest trends in the financial world. I have successfully navigated various market conditions and have a proven track record of making informed investment decisions.
Now, let's delve into the concepts mentioned in the provided article:
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Equities and Inflation-Beating Returns: The article emphasizes the allure of equities for investors, especially those new to the market, driven by the potential for inflation-beating returns over the long term. This aligns with the fundamental principle that equities historically have outperformed other asset classes over extended periods.
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Nifty 50 ETF: The focus shifts to the Nifty 50 ETF, which is portrayed as an optimal starting point for novice investors. The Nifty 50 is an index comprising the largest Indian companies in terms of market capitalization. An ETF (Exchange-Traded Fund) that tracks this index offers investors exposure to a diversified basket of 50 blue-chip stocks.
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Diversification and Risk Reduction: Diversification is highlighted as a key advantage of investing in the Nifty 50 ETF. By holding a basket of 50 stocks, investors can reduce risk compared to investing in a single stock. The article stresses that market gyrations may impact individual stocks more adversely than a diversified portfolio.
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Cost of Investing in ETF: The cost aspect is crucial, and the article underscores the affordability of investing in the Nifty 50 ETF. As a passive investment vehicle, the ETF incurs lower costs since it tracks the Nifty 50 index with limited churn in index constituents. The expense ratio is mentioned to be between 2-5 basis points, making it relatively inexpensive.
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Accessibility for Small Investments: The article addresses the issue of high share prices for individual stocks and positions the Nifty 50 ETF as a solution for small investors. It emphasizes that even with a minimal investment, individuals can buy units of the ETF, providing an entry point for those with limited financial resources.
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Understanding Market Dynamics: The Nifty 50 ETF is portrayed as a great starting point for understanding market dynamics without taking excessive risks. It allows investors to familiarize themselves with factors driving the markets, laying the groundwork for exploring other equity-related options such as small- and mid-cap stocks or mutual funds.
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Tracking Error: The article briefly touches on the concept of tracking error, a measure of the deviation of fund returns from the underlying index. A lower tracking error is considered better, and the specific ETF mentioned in the article, ICICI Prudential Nifty 50 ETF, is highlighted for having a low tracking error of 0.03%.
In summary, the article advocates for the Nifty 50 ETF as an ideal entry point for new investors, citing its diversification benefits, low cost, accessibility for small investments, and potential for understanding market dynamics. The emphasis on the tracking error reinforces the reliability of the specific ETF mentioned.
