What is NIFTY 50- How it is Calculated & How to Invest in It. (2024)

You must have come across news headlines mentioning NIFTY 50 several times. Newspapers and TV channels flash NIFTY 50 charts almost every day, and investment experts continuously use the term ‘NIFTY 50’ while analyzing what will happen in the stock market. But what is this NIFTY 50 you keep hearing about all the time?

In this blog, we will explain everything you need to know about NIFTY 50 and how you can invest in it to build considerable wealth in the long run.

What Is NIFTY 50?

NIFTY 50 is an index consisting of India’s top 50 large-cap companies that are leaders in their respective sectors. So, only some of the biggest and most reputed companies in India become a part of this index.

We will talk about how these top 50 large-cap companies are selected based on their free-float market cap a bit later in this blog. But for now, let’s keep it simple that the NIFTY 50 index is a basket of the top 50 large-cap companies in India. And the index is used as a hypothetical portfolio that can reflect the overall movement in the Indian stock market.

The change in the NIFTY 50 that you often see in the news comes from the change in the stock prices of the 50 underlying companies that constitute the index.

NIFTY 50 Companies As of Jun 30, 2021

How is NIFTY 50 Calculated?

The value of NIFTY 50 is calculated using the free float market capitalisation method.

To arrive at the value of the NIFTY 50 index, the current market cap of all the stocks that are part of NIFTY 50 is divided by the Market Cap of the base period.

The current market cap is the weighted market cap of all 50 companies. It is calculated by multiplying free float shares with the market price of the share. Free float shares represent the total number of outstanding shares, excluding those held by promoters, government, trusts, etc.

The base date for NIFTY 50 is taken as 3rd November 1995, with an assigned base value of 1000 and a corresponding base market capital of Rs. 2.06 Trillion.

The formula for the NIFTY 50 calculation:

Index Value = (Current Market Cap / Base Market Capital) x 1000

Here,

The current market cap is the weighted market cap calculated for the index

Base market capital is the weighted market cap of all 50 index companies in the base period.

1000 is the value of the NIFTY 50 index in the base date

How Are Stocks Selected To Be Part NIFTY 50?

There are certain sets of rules that decide which 50 stocks should be part of the NIFTY 50 index. Here are some of the rules and criteria on which the construct of NIFTY 50 is based:

Universe: The primary criteria to be a part of NIFTY 50 is that a company must be listed on the National Stock Exchange (NSE). Also, the stocks of a company should be available for trading in NSE’s Futures & Options segment. If the company is not listed and traded on NSE, it cannot be a part of NIFTY 50.

Basic Construct: From the universe of NSE, the top 50 large-cap companies are selected based on their free-float market capitalization. The free-float market cap is calculated by multiplying a company’s stock price with the number of shares readily available in the market. For example, if a company has 1 lakh shares readily available in the market and the price per stock is Rs. 30, then the company’s market capitalization is Rs. 30 lakh.

Liquidity: Another crucial factor for a stock to be considered for addition to NIFTY 50 is its liquidity. What it means is that stocks which are part of the NIFTY 50 index must be easy to buy and sell, and the trading volume of such stocks must be high.

Rebalancing And Reconstitution: The 50 companies in the NIFTY 50 index are not fixed. The index does a rebalancing on a semi-annual basis in June and December every year. Through the rebalancing process, the NIFTY 50 index removes stocks that would have fallen in market cap or would have undergone suspension or delisting. The removed stocks are then replaced by emerging stocks that would have increased in market cap. This rebalancing process automatically increases the exposure of NIFTY 50 to emerging stocks and sectors.

Stock Selection’s Impact On Weightage Of Different Companies And Sectors In NIFTY 50

Each of the 50 stocks in NIFTY 50 does not have an equal weightage in the NIFTY 50 index. This is because companies with a higher free-float market cap naturally have higher weightage in the index. For instance, Reliance Industries, whose market cap on June-end 2021 is around Rs. 14 lakh crore, has a slightly higher weight in the index against HDFC Bank, whose market cap is around Rs. 8.3 lakh crore. Similarly, both Reliance Industries and HDFC Bank’s weight is higher than Axis Bank whose market cap is around 2.3 lakh crore.

Here is a list of the top 10 stocks in NIFTY 50 with their total weight in the index.

NIFTY 50 Performance: How much return has it generated?

Given the nature of the equity market, NIFTY 50 has witnessed many ups and downs since its inception in 1996. There have been years when the index witnessed a decline of 51%, and there have been years when the index climbed by more than 70%. But on a long-term basis, the index has risen significantly, and in the last 15 years, the NIFTY index has delivered an annual average return of 13%.

To put this return in perspective, if you had invested Rs. 10,000 a month in the NIFTY 50 index for the last 15 years, you would have accumulated over Rs. 53 lakh by June 2021 at an annual average return of nearly 13%.

As the chart shows, the absolute returns would not be a considerable amount for the first few years. If you look at the graph closely, there have been instances when your investment would have been in the negative after 2-3 years. But if you stayed the course, the line of profits growing slowly suddenly started to pick up pace due to the impact of compounding coupled with good returns.

How To Invest In NIFTY 50?

As we mentioned earlier, NIFTY 50 consists of the top companies in India, and if you buy the NIFTY 50, you become part-owner of these fantastic companies. Now, there are two ways to invest in NIFTY 50.

One, buy stocks directly in the same percentage as their weightage in NIFTY 50. The second option is to invest in Index Mutual Funds that track NIFTY 50. These index Mutual Funds replicate the NIFTY 50, i.e., have a portfolio precisely like the index. So, a NIFTY 50 index fund will have the 50 stocks in the same proportion as the NIFTY 50, and all you need to do is invest whatever amount you want to invest in these funds.

Direct Stock Route or NIFTY 50 Index Funds: Which Is Better?

If you decide to invest directly in stocks depending on their weightage in the NIFTY 50, it will be an expensive, hectic, and complicated exercise.

If you invest directly in stocks, one of the significant challenges is the amount of money you require to replicate the NIFTY 50 index. You cannot buy a fraction of stocks in India, which means that you must purchase a complete stock and not a part of it. This means you will have to deploy a considerable amount of money to buy all the 50 stocks in NIFTY 50.

Let’s understand the challenges with an example. Suppose you want to invest Rs. 20,000 in NIFTY 50 every month. Now, one stock of Nestle would cost you more than Rs. 17,500, while one stock of Bajaj Finance would cost you over Rs. 6,000. So, if you buy one stock for each of these two companies only, you would cross your monthly limit of Rs. 20,000. Imagine how much money you would require to buy all the stocks that comprise the NIFTY 50 index.

Besides vast amounts of money, you will also need to buy all the 50 stocks according to their actual weightage in the index and keep up with the weightage that changes daily. This is a highly time-consuming exercise. Because the weightage of stocks varies with the rise or fall in their value, and you will need to make the changes in your portfolio daily to replicate the index.

A solution to all these challenges is to invest in index Mutual Funds simply.

Benefits Of Investing Via NIFTY 50 Index Funds

Low Investment Amount – Since index funds pool money from several investors, Mutual Fund companies allow you to invest a smaller amount of money. You can start investing with as low as Rs. 500 a month through SIPs and can be a part-owner of all the 50 stocks of NIFTY 50 in the same proportion as the index.

Investment Flexibility – The flexibility of investing in NIFTY 50 via index funds is not limited to low investment amounts through SIP. You can increase or decrease the amount you are investing at any time you want and by any amount you want. This makes the process of investing extraordinarily convenient and hassle-free.

Low-Cost Investment – NIFTY 50 index funds simply replicate the NIFTY 50 index. Thus, there is no need for a team of analysts and researchers to help the fund manager take tactical decisions such as which stocks to buy, when to buy, when to sell, etc. Moreover, there is no active buying and selling of stocks. All these factors make the expense of managing NIFTY 50 index funds low. As a result, this translates into low fees for you as an investor.

No Need To Worry About Rebalancing – When you invest in a NIFTY 50 index fund, your money is managed by a fund manager who maintains it in the same exact proportion as the NIFTY 50 index. Any increase or decrease in the weightage of a stock is done by the fund manager. So, you don’t need to worry about rebalancing or maintaining stocks in the same exact proportion as the NIFTY 50 index.

No Bias In Investing – When you invest in a NIFTY 50 index fund, you follow an automated and rule-based investment methodology. The fund manager has a defined mandate on which stocks to buy and how much to buy. This process removes the human bias while making investment decisions, and the fund can be an excellent addition to your portfolio.

Bottom Line

By investing in the NIFTY 50 index, you get to invest in 50 leaders in their sectors. So you give yourself a great chance to accumulate enormous wealth in the long run. And investing in the NIFTY 50 index can be convenient, easy, and cost-effective if you invest through index Mutual Funds.