Step-by-step guide on direct investing in Nifty Index Funds!

Nifty is a predominant term in Equity Markets. With the advent of passive funds, retail investors now have the opportunity to invest in the Nifty Index. Prior to delving further into this, let us gain an overall understanding of Nifty, its composition, and also Index Funds. Let us first see what are Index Funds?

What are Index Funds?

An Index fund resembles a typical mutual fund, but its primary objective is to mirror the performance of a specific index, such as the Nifty 50 or Nifty Midcap 150 Index. The purpose of these funds is to closely follow the composition of the underlying Index without making active decisions or deviating from it. Many investors view these funds as an excellent option for long-term investment or retirement planning as there is no risks associated with the change of fund managers.

What are Nifty 50 Index Funds?

These funds invest in the Nifty 50 Index, intending to mirror its composition consistently. The NIFTY 50 stands as a benchmark Indian stock market index, reflecting the weighted average of the 50 largest Indian companies listed on the National Stock Exchange. This index has garnered substantial popularity among both domestic and international investors who use it to monitor the performance of the Indian equity market. Notably, it encompasses 63% of the free float market capitalization of listed stocks on the NSE.

What are the benefits of investing in Nifty Index Funds?

1. Low Cost: Since the objective of the Fund is solely to replicate the underlying benchmark, there is no requirement for active research or stock selection. Consequently, these funds typically feature a lower expense ratio in comparison to the active funds.

2. Well Diversified: Indices are formulated by Index providers such as NSE. Most broad market indices are well diversified as they impose limits on single stock exposure and even at the sector level. For instance, the Nifty 50 Index fund that tracks the Nifty 50 Index is structured from a composition of 50 stocks diversified across 14 sectors.

3. No Fund Manager Bias: In active funds, the performance relies significantly on the fund manager. As fund managers may change jobs or retire, it can substantially affect the performance of the scheme. However, in Index Funds, the fund manager’s role is confined to replicating an Index. Therefore, even if there is a change of the fund manager, it doesn’t influence the performance. Additionally, fund managers might exhibit certain human biases that could impact the performance. On the other hand, Index Funds adhere strictly to a set of rules and remain cordon off from any psychological bias.

4. High Liquidity: Similar to Mutual Funds, Index Funds are typically open-ended with a potential exit load within the first year. This offers investors the flexibility to invest or redeem their investments at any time.

How can you directly invest in Nifty Index funds?

An investor has the choice to invest either through online or offline modes. The option of online transactions is accessible through the official website of the fund house. Investors can subscribe, redeem, switch, and conduct various other transactions through the online channel. Here is a step-by-step guide to the online investment process.

Step 1: Complete the KYC process: It can be completed either online through the AMC’s website or offline by filling out a form. The most convenient method is e-KYC. It is an electronic verification process for customer identities. This procedure is Aadhaar based and can be completed within a few minutes.

Step 2: Select Fund, Tenure and Amount: Investors are required to select Nifty Index funds. They will have to specify the tenure of investment and the investment amount. For lump sum investment, a one-time payment is necessary. However, for SIPs (Systematic Investment Plans), one needs to enroll for a NACH (National Automated Clearing House) mandate to enable monthly payments.

Offline Process of Investing:

Step1: Fill the application form and KYC (Know Your Customer) form

Step 2: Enter the necessary details, as required, like Investor Details, Address, Bank details, Nominee details etc.

Step 3: Based on your financial goals and tenure of investment amount, identify the Nifty Index fund to invest in.

Step 4: Make the payment of the amount you want to invest via selected mode of payment.

Step 5: It is possible to invest via SIP as well and for that one needs to Set up Billpay / eMandate / eNACH digitally. One might also need to fill the ADF (Auto Debit Form) or OTM (One Time Mandate) via offline form, whichever applicable.

Conclusion

Index Funds are considered one of the most efficient methods for investing for long-term horizons such as retirement planning. However, the critical aspect of investing in Index Funds lies in selection of the appropriate Index based on individual risk appetite and the investment tenure. Another essential consideration before you opt for an Index Fund is the tracking error. This metric assesses the divergence of the Fund’s performance from that of the Underlying Index. Investors should steer clear of funds with higher tracking errors. Overall, Index Funds can substantially contribute in establishing a solid foundation for long-term wealth creation.