How Should One Invest In Nifty?

The Nifty is NSE’s (National Stock Exchange) benchmark of stock market index for Indian equity market. It makes up for about 50% of the total trade stock in NSE. It is a barometer of the performance of NSE, and hence an indicator of the Indian economy. If Nifty goes up, it means that the entire market is going up and vice versa. 
 

As one can see in the above figure, Nifty is made up of the top 50 listed companies on the National Stock Exchange. The companies, selected from different sectors, are the leading companies in the country.
Investing in Nifty is different from investing in NSE. By investing in the index (Nifty), you reap in the growth from the entire diversified portfolio of 50 stocks. If you wish to invest in Nifty, there are several ways to do so:

Spot Trading:

The simplest way of investing in Nifty is through purchasing the Nifty script which is similar to purchasing equity shares of listed companies. Once you purchase the stock, you’re eligible to benefit from the capital gains arising out of the price movement of the index.

Derivative Trading:

Derivatives are financial contracts that derive their value from an underlying asset. These could be stocks, indices, commodities, currencies, etc. Here, the parties agree to settle the contract on a future date and make profit by wagering on the future value of the underlying asset. For trading in Nifty index directly, you have two derivative instruments:  

Nifty Futures:

A future contract is an agreement between the buyer and the seller for buying and selling of Nifty on a future date. During the contract period, if the price goes up, you can sell them and earn the difference; and if the index goes down you can wait till the settlement date.

Nifty Option:

In a option contract, the contract is between the buyer and the seller for buying and selling stock of Nifty on a future date and at a specific price. The buyer of the option contract pays a premium and obtains the legal right, but not the obligation to purchase/sell Nifty in the future if the price is to his advantage.

Index Funds

It is a type of mutual fund with a portfolio (stocks, bonds, indices, currencies, etc.) constructed to match or track the components of market index (stocks and their price fluctuation) which provides broad market exposure. Such funds invest in various indices, including Nifty.

The growth of Nifty index in recent years have attracted retail investors, institutional investors and foreign investors to invest in Nifty either directly or through the index funds. Therefore, Nifty is a profitable investment proposition for any investor who is looking forward to invest in the index.

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