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The Indian stock market holds several prospective options where you can choose to invest in single stock or a group of stocks from either the same or different sectors. In case you have started researching about stock investing, you might have heard about market indices and their working. NIFTY is one prominent index in the National Stock Exchange that mirrors the performance of the top 50 companies in the market in terms of capitalisation. In this article, you will understand the meaning of NIFTY, its workings, and explore how it can be a valuable asset in your investment portfolio.

Understanding an index in the stock market
 

Before getting into the specifics of NIFTY, it's essential to understand the concept of an index in the financial market. An index is essentially a statistical measure of the changes in a particular set of securities over time. It provides a snapshot of the market's overall performance, reflecting the ups and downs of the included stocks. 

What is NIFTY?
 

NIFTY, short for National Stock Exchange Fifty, is the flagship index of the National Stock Exchange of India (NSE). It consists of the top 50 companies listed on the NSE, representing various sectors of the Indian economy. These companies are selected based on their market capitalisation and liquidity and several other factors.

How does NIFTY work?
 

NIFTY works on the free-float market capitalisation methodology, which takes into account only the tradable shares of a company. This ensures that the index reflects the true market value of the companies included. The index is calculated using a weighted average market capitalisation, where larger companies have a more significant impact on the index movement.

Eligibility criteria for companies to be a part of NIFTY Index
 

For a company to be part of the NIFTY index, it must meet certain eligibility criteria. This criteria includes a history of positive net worth, a regular trading frequency, and compliance with various regulatory norms. Here are the common requirements:  

• Domicile: The company must be domiciled in India, underscoring the index's focus on representing the Indian economy. The stocks of the company should be traded on the National Stock Exchange (NSE), including both listed and non-listed stocks allowed for trading on the NSE.
• Liquidity: Stocks must have been transacted at a maximum average cost of 0.50% in the last six months for 90% of the observations if the portfolio is worth ₹10 crore. The impact cost, measuring the cost of performing a transaction in an asset, is also considered which ensures that the stock is relatively easy to buy or sell.
• Type of securities: Eligible companies must already be part of the NIFTY 100 index, emphasising a tiered approach to index inclusion. Securities should be tradable in the NSE's Futures & Options (F&O) segment, ensuring a level of liquidity and market activity.
• Float-adjusted market capitalisation: The freely floating assets' market capitalisation, compared to the smallest company in the index, should be at least 1.5 times more for a stock to be considered for the NIFTY 50 index. It emphasises the relative size and importance of the stock in comparison to other index constituents.
• Trading frequency: To be included in the NIFTY 50 index, a stock must achieve a 100% trading frequency in the last six months, signifying that it has been traded every day during this period. This criterion ensures that included stocks are actively traded, contributing to the liquidity and representation of market dynamics.
• Differential voting rights (DVR): Only equity shares with differential voting rights can be included in NIFTY 50. The DVR free float should be at least 10% of the company's free-float market capitalisation and 100% of the free-float market capitalisation of the last security in the index, promoting a balance in voting rights.
• Listing history: An initial public offering (IPO) can be considered for inclusion if it meets the index's regular qualifying criteria for float-adjusted market capitalisations and impact for a minimum three-month period instead of six months. This provision allows newly listed companies to be part of the index, provided they meet specific criteria during their initial trading period.

How can you invest in NIFTY index?
 

Investing in the NIFTY index can be done through various financial instruments such as index funds, exchange-traded funds (ETFs), and index options. These instruments allow investors to gain exposure to the entire index without purchasing individual stocks.

What is the best way to invest in NIFTY?
 

The most efficient way to invest in NIFTY is by opening a 3-in-1 demat account with IDFC FIRST Bank. It is a joint offering by IDFC FIRST Bank and ICICI Securities where your trading account is managed by ICICI Securities and the bank account and the demat by IDFC FIRST Bank. The 3-in-1 account combines a savings account, trading account, and demat account, streamlining the investment process. By opening this account, you get the following benefits:

• No charges for opening a 3-in1 account
• No account maintenance charges for the first year
• Earn interest on the hold amount
• No minimum account balance requirements
• Advance trading tools for quick and right decisions
• More than 50% discount on brokerage rates with ICICI Direct

Benefits of investing in NIFTY index
 

• Diversification: NIFTY comprises stocks from various sectors, reducing the risk associated with investing in individual companies.
• Market representation: NIFTY represents the performance of the broader market, making it a reliable indicator for investors.
• Liquidity: Being a well-traded index, NIFTY instruments offer high liquidity, allowing investors to buy or sell positions easily.
• Cost-effective: Investing in NIFTY through index funds or ETFs is often more cost-effective than purchasing individual stocks.
• Passive investing: NIFTY facilitates passive investing, making it an excellent choice for investors looking for a long-term, low-maintenance strategy.

Who should invest in NIFTY?
 

NIFTY is suitable for a wide range of investors, right from beginners to seasoned professionals. It is particularly beneficial for those seeking a diversified portfolio with exposure to the Indian stock market without the complexities of managing individual stocks.

Conclusion
 

NIFTY is an important index in the Indian financial market, providing investors with a reliable benchmark for gauging market performance. Understanding its working methodology and the various ways to invest in it can empower you to make informed investment decisions. Whether you are a new or experienced investor, exploring the potential of NIFTY could be a wise step towards building a robust and diversified investment portfolio.



 

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.