Eliminate Your Fear And Know How To Buy Nifty Index In 3 ways | Buying Nifty Index ETF Nifty derivatives

Welcome,

Under this topic of how to buy Nifty index, we will study varied topics like Nifty index, index mutual fund, Nifty 50, NIFTY next 50, exchange-traded fund ETF, how to buy Nifty index, taxes on Nifty index, Nifty index fund vs exchange-traded fund, Hedging of the index fund and many more.

When one questions how to buy the Nifty index? Then basically there would be two prospective for buying Nifty index:-

1 From trading point of view

2 For long term investment

From a trading point of view, you would consider buying the Nifty index for a short term period. It can be based on speculations or option future or to hedge your long term investment.

To buy Nifty index for short term you could consider buying derivatives of nifty which are futures and options contracts. For long term investment you would be required to invest in index mutual or exchange traded fund ETF as this instrument does not have expiry like derivatives.

In this article on how to buy Nifty index we will be discussing buying Nifty index for both short term and long term. There is no obligation to keep index Mutual funds or ETF for the long term.

What is index 

The index can be anything e.g. list of students, a topic in the book, contact number, etc. 

But in the field of stock market or security market index has been clearly defined as a statistical measurement of top stock listed on any exchange.

Quite confusing! In simple terms, the index is the average of the top 50 or 30 companies (In the case of nifty or Sensex respectively) as per their weightage. 

Being an average of top 50 companies in India- Nifty has continuously seen a rise year on year. Since the outperforming companies eventually join Nifty 50 club and one not performing well be departed. As long as India as an economy is growing the index Nifty also seems to grow with it.

Types of Nifty index 

In this article, we will be particularly discussing only the Nifty index as NSE is a private company. We cannot directly invest in it. For this, we need to buy the Nifty index.

Check What is the Meaning of Nifty and Sensex?

The different indexes are:-

1 Nifty 50

The weighted average of the top 50 companies listed on the National Stock exchange.

2 NIFTY next 50

New Nifty 50 company will definitely be one from top 51 to 100. So did this index track top 51 to 100 companies listed on NSE and the index is called NIFTY next 50.

These are 2 broader indices for trading and tracking of the overall market. The other Nifty in the index are sectoral indices like 

Nifty auto index 

Nifty Bank index

Nifty financial services index

Nifty FMCG index 

Nifty healthcare index 

Nifty it index 

Nifty media index 

Nifty metal index 

Nifty Pharma index 

Nifty private bank index 

Nifty PSU Bank index 

Nifty realty index 

Nifty consumer durable index 

Nifty oil and gas index

As the name suggests this Nifty index tracks the top companies of a particular sector. The different Nifty indexes are used by various mutual fund houses and investment firms as their benchmark. 

The Ultimate goal of every investment instrument is to beat the index.

Why you should invest in nifty index 

Even if you compare Nifty 50 and NIFTY next 50 from the start of this decade I.e. 1 January 2010 the nifty 50 was at Rs.5201 and NIFTY next 50 at Rs.10382 whose today’s value as of 22 July 2021 is at Rs.15824 and Rs.39359 respectively.

nifty 50
Nifty 50
nifty next 50
Nifty Next 50

This turned out to be a cagr of 10.64% on Nifty 50 and cagr of 12.87% over 11 years.

And to get such an incredible return you don’t have to do any fundamental analysis or technical analysis of the stock.

How to buy Nifty index

If you want to know how to buy the Nifty index then you should be aware of actually what you are going to buy.

Buying Nifty index means you are mimicking Nifty 50 or NIFTY next 50 or any other index as per the weightage of companies in that index.

Obviously, you cannot track index on regular basis and add and remove companies in your portfolio as per the index. So for this, you deploy your capital with a fund manager who will passively manage your fund by mimicking NIFTY 50 or any other index.

If you want to know more about active or passive mutual funds or anything about mutual funds you can check our article on how to select a mutual fund for more details.

Whenever you are deciding how to buy Nifty index you will have two choices, you can either go with an index fund r ETF exchange-traded fund to buy the Nifty index 

1 Buying nifty index through Index fund 

Index funds are actually mutual funds that are passively managed. The allocation of funds is done as per Nifty 50 or the respective index. 

To buy Nifty index you can use your broker like Zerodha, Upstox, grow, or can directly contact a mutual fund house like UTI, HDFC mutual fund, SBI Mutual fund, Nippon India mutual fund, etc.

How to open an Account at Zerodha?

You do not require a Demat or trading account to buy Nifty index through an index fund or index mutual fund. 

The expense ratio is less than any other mutual fund.

You can invest in SIP or even with the minimum amount you wish to invest. Buying and selling depending on the closing price of assets. There isn’t any liquidity problem in index mutual funds as you can directly ask mutual funds to sell your holdings.

2 Buying Nifty index through Exchange-Traded Fund ETF

As the name suggests, exchange-traded funds are available on an exchange like stocks. Their prices are derived from underlying assets Nifty.

But the NAV of ETFs is decided as per open market demand and supply of that particular ETF. 

To buy Nifty index through ETF you would require a trading account and Demat account film stockbrokers like Zerodha, Upstox, Angel booking, or any other broker.

You have to simply search for the ETF in the search bar and different ETFs like UTIETF, HDFCBankETF, NiftyBeES, etc will be available for investment.

The expense ratio for ETF is as low as 0.05% but you have to incur brokerage charges on buying and selling of that ETF. 

That’s why Selecting the right broker will be considerable. 

Here is a list of top brokers in India

ETF can be bought and traded at a market hour as per stocks. You need to buy an ETF at unit multiple, which means you can buy 1,2, or only in discrete quantities and like index fund where you can invest in fractions or do regular SIP.

3 Buying derivatives of Nifty

you can invest in nifty index through futures and options. As this derivatives has its expiry (monthly expiry & weekly expiry) you can invest only for short term or investment can be done to hedge your long term investments.

To buy Nifty derivatives you can simply search for Nifty future or Nifty call or put and buy it by giving the premium amount. The profit and loss will be depend on Nifty behaviour.

Taxes on buying Nifty derivatives will always be Short term capital gain tax as you can hold your investment for 3 months maximum.

Taxes on the index fund and exchange-traded fund ETF

As per Indian Income-tax, the gain through index fund investing or ETF is considered under the capital gain tax. There are two types of capital gain tax depending  on their duration

1 Short term capital gain:-

If the duration of investment in which you buy and sell is less than 1 year and you have capital gains on it then you have to pay short-term capital gain tax as per your tax slab 5%, 10%, etc.

2 Long term capital gain tax:-

If you sold your investments one year after the date of purchase then that gain occurred under the long-term capital gain tax. 

LTCG tax will be expected from tax till the cap of Rs.1 lakh after which it will be taxed at the rate of 10%.

How to buy Nifty index: Summary 

The nifty index can be brought in 3 ways:-

Buying index mutual funds

Exchange-traded fund ETF

Buying Nifty Derivatives

Both these have their own merit and demerits

The major difference between the two is that the former does not require a trading and Demat account and is a highly liquid exchange-traded traded fund ETF that can be traded similar to stock and the expense ratio is less than the index Mutual fund.

Investing in future and options i.e. nifty derivatives is only for short term. You can use this instrument to hedge your portfolio or for short term trading.

Hope we tried to clear your doubts regarding how to buy Nifty index and the process of how to buy the Nifty index. 

For any query or doubt regarding this article you can comment below we will definitely get back to you as soon as possible.

This article is completely about educational purposes only and any trading-related decision should be taken under the guidance of an investment advisor only.

Happy trading and investing!

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Divyanshu Lad

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