Why should you invest in NIFTY 50

The NIFTY is a stock market index launched by the National Exchange of India (NSE) which tracks the performance of the companies listed on the NSE. The NIFTY 50 benchmark index tracks the performance of 50 large-cap companies listed on the NSE.

Apart from NIFTY 50, there are several other indices in the Indian stock market including the S&P BSE 500, NIFTY Next 50, and others. So, why is investing in NIFTY 50 a popular choice over other indices? Well, there are several reasons as to why the NIFTY 50 for beginners is a great choice for entering the stock market.

One such reason is that the NIFTY 50 offers a diversified portfolio of blue-chip stocks. This balances risk and provides exposure to various companies' growth. Beginners who are planning for NIFTY 50 investments must know all the basics of the NIFTY 50 index to build a well-optimised portfolio.

Understanding NIFTY 50 is not just about knowing which companies are included in the index. It also involves grasping the underlying economic factors that drive these companies' performance. Here’s a snapshot of the NIFTY 50’s performance since its inception:

As seen in this chart, NIFTY 50 index has undergone numerous fluctuations since it was established in 1996. It has endured periods of sharp decline, dropping by as much as 51%, and periods of rapid growth, soaring by over 70%. However, examining its long-term trajectory reveals a substantial overall increase. Over the past 15 years, the NIFTY index has yielded an average annual return of 13%.

To illustrate the impact of this growth, consider a consistent investment of Rs. 10,000 per month in the NIFTY 50 index over a period of 15 years. Such an investment strategy would have resulted in a portfolio valued at more than ₹57 lakh, assuming an average annual return of approximately 13%.

Composition of the NIFTY 50 Explained: The composition of the NIFTY 50 index is dynamic and undergoes a systematic rebalancing twice a year. During this process, the index is updated to exclude stocks that have experienced a decrease in market capitalization, or those that have been suspended or delisted. Concurrently, it incorporates rising stocks with growing market capitalization.This methodical adjustment ensures that the NIFTY 50 index consistently reflects the evolving landscape of emerging stocks and sectors.

The following table exhibits the most recent sector wise exposure of the NIFTY 50 index.

NIFTY 50 Stock Selection Criteria:

The NIFTY 50 stock selection criteria is quite simple and mainly drills down to two key conditions: it must have its shares listed on the National Stock Exchange (NSE), and its stocks must be actively traded within the NSE’s Futures & Options segment.

Another essential criterion for a stock’s eligibility for the NIFTY 50 index is its liquidity. This implies that the stocks included in the index should facilitate effortless trading, characterised by a substantial trading volume.

The selection of the top 50 large-cap companies for the NIFTY 50 index hinges on their free-float market capitalization. This metric is determined by taking the stock price of a company and multiplying it by the quantity of shares that are freely accessible for trading. For instance, if there are 1 lakh shares of a company available for trading and the stock is priced at Rs. 30 per share, the company’s market capitalization would be Rs. 30 lakh.

Since its inception in November 1995, NIFTY 50’s performance has been remarkable in terms of its market capitalization coverage - expanding from 33.7% to 47.35% as of March 2024.

The NIFTY 50’s historical significance is quite large for its key role in shaping the Indian stock market and there are about 12 companies present in NIFTY 50 since its inception – including Hindustan Unilever Ltd, ITC Ltd., Tata Motors Ltd., Tata Steel Ltd., State Bank of India and others top large cap companies.

Historically, the NIFTY 50 index emerged as a key indicator during times of economic growth, and its performance has often mirrored the broader economic landscape. The ongoing relevance of the NIFTY 50 lies in its ability to adapt to changing market conditions while continuing to represent the top-performing companies in India.

NIFTY 50 Performance: Key drivers of the past

The NIFTY 50 has seen multiple peaks and troughs each corresponding to different phases of economic growth and market euphoria. Two notable periods of peak performance include:

• The Early 2000s: After the economic liberalisation in the 1990s, the early 2000s witnessed a significant rally in the NIFTY 50 index. The IT boom, driven by companies like Infosys, Wipro, and TCS, played a crucial role in this surge. During this time, stocks in the technology sector saw unprecedented growth, with investors placing enormous trust in the potential of these companies.
• The Post-2008 Recovery and the Bull Run of 2014-2017: After the global financial crisis of 2008, the Indian market began recovering, leading to a robust bull run between 2014 and 2017. During this period, the NIFTY 50 index reached new highs, driven by a combination of domestic reforms, stable government policies, and strong corporate earnings. Companies like HDFC Bank, Reliance Industries, and ITC were key contributors to this growth.

NIFTY 50 Market Analysis: Future outlook

In 2023, a number of records were broken as a result of India's multi-year bull market. For instance, the nation's whole stock market capitalisation crossed $4 trillion for the first time, and throughout the course of the year, net inflows of $8.6 billion were made into exchange-traded funds (ETFs) with an emphasis on India.

Despite global economic uncertainties, investor sentiment towards the NIFTY 50 remains largely positive. This optimism is underpinned by strong corporate earnings, government reforms, and India’s robust economic growth projections. As per Morgan Stanley’s estimates, the Indian stock market is projected to surpass the US and China and become the third largest in the world by 2030.