Is it a good time to invest in the Nifty 50 index?
We have been hearing the news of high inflation, rising interest rates, bank failures, a possible recession, and much more.
As a result of this, the Nifty 50 has been trading in the range of 15,183 to 18,887 in the last 52 weeks* and mainly around the levels of 16,800 to 17,800.
It has given hardly any returns in the last year. So, you might be wondering if it is a good time to invest in the Nifty 50 index fund. Let us find out the answer to this question!
*(At the time of writing this article as on 19th April 2023).
What is the Nifty 50 Index Fund?
To explain it briefly, Nifty 50 is an index of the top 50 companies by market capitalization. Index funds with their underlying index as Nifty 50 invest in those 50 companies.
This is the passive way of investing in the Nifty 50. So, the returns generated by those funds would be similar to what the returns have been generated by Nifty 50.
Generally, the returns generated by an index fund would be lower than the return of the index because of the expense ratio.
Benefits of Investing in the Nifty 50 Index Fund
There are many benefits of investing in the Nifty 50 index fund. Some of them are:
- You get exposure to the largest 50 companies in India.
- You get returns similar to Nifty 50 generated during the same period.
- The risk of underperformance of the fund manager is significantly eliminated as the fund replicates Nifty 50.
- The expense ratio is significantly less as the fund manager is not required to exercise his expertise.
Is it a good time to invest in the Nifty 50 Index Fund?
Now coming to our core question, let us first discuss some facts. The above chart shows that the Nifty 50 has given an excellent return since its inception.
But it has also witnessed some crashes, such as the Dot Com Bubble in 2000, Sub-Prime Crisis in 2008, Covid Pandemic in 2020, etc. But still, it has given some excellent returns.
If one had started to invest since inception, kept consistency in investing, and remained invested, she/he would have generated massive wealth.
When we look at the graphs above, we look at the massive wealth created over the period. But generally, we ignore the period of downturn and sideways movement. In the short run, markets behave like drunken men. Predicting where it will go in the short run is very difficult.
But in the long run, markets reward patience and consistency in your investing. As it is said, the best time to plant a tree was 20 years ago. The second-best time is now. So just because the Nifty 50 has not given any significant return in the last year does not mean you should not invest in the Nifty 50 index fund.
Instead, investing at regular intervals can help investors to average their cost of total holdings.
Those looking at valuations and P/E ratio can see that the current Nifty 50 P/E is at around 20x, much lower than the historical highs of 40x.
Also, as per the reports of many organizations such as RBI, IMF, and World Bank, it is expected that the Indian economy would grow and would drive the world economic growth, although at a relatively slower rate than the earlier projections.
Large companies would take the maximum benefit of this. Hence, this is a good time to invest in the Nifty 50 index fund.
Risks and Time horizon
Nifty 50 is an index of large-cap equities. Hence, index funds having the Nifty 50 as its underlying index have a high risk.
However, these funds are not as risky as small-cap funds as the companies are relatively stable due to their large market share and size. Investors seeking returns better than the usual debt options can consider these funds for a longer time horizon, such as 5 to 7 years or even more.
You can invest in the best Nifty 50 Index Funds and the best index funds with other underlying indices through the EduFund App.
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