etf investment: Nifty50 ETF: The best choice for first-time equity & direct stock investors – Blue Barrows

Many investors, new to equities, often wonder about how to get started on the right investment path. The draw towards equities is usually the prospect of making inflation-beating returns over the long-term. And reaching all our goals does require an element of equity exposure, be it via mutual funds, direct stocks or a combination of these two options.

But if you are new to equities and want to make a start with stocks directly, making a decision on the right company to invest in is not easy – you need to understand a company’s financials, business prospects, valuations, industry dynamics, market conditions etc. Here’s where the Nifty 50 ETF (exchange-traded fund) comes into the picture. An ETF, which tracks a specific index, is traded like stocks on the exchanges but is offered by a mutual fund house. You can buy and sell units of ETFs from the exchanges during market hours.

In this regard, the Nifty 50 ETF is one of the optimal starting points for first-time stock investors and in general for those beginning their equities journey.

Exposure to a diversified basket of 50 blue-chip stocks

The Nifty 50 index comprises the largest Indian companies in terms of market capitalisation. Therefore, investing in a Nifty 50 ETF provides excellent diversification across stocks and sectors for an investor as it replicates the index.

Source: NSE

A diversified portfolio reduces the risk for an investor, which is not the case with investing in a single stock, where market gyrations can impact the price of a stock more adversely than a basket of companies. Also, the returns from investments in the Nifty 50 ETF would mimic the movements in the underlying index. The only requirement is that you need a Demat account for investing in ETFs.

The cost of investing in an ETF is very low
Investing in the Nifty 50 ETF is relatively inexpensive. Since the ETF tracks the Nifty 50 index passively and there is limited or no churn in the index constituents, costs are low. The expense ratio, or in other words what funds charge, is just 2-5 basis points (0.02-0.05%). One basis point is one-hundredth of a percentage point.

Suitable even for those with small investments

As a newbie investor in equities and stocks, you may find the prices of shares of some companies to be quite pricey in absolute terms. There are stocks within the Nifty basket that trade at anywhere from Rs 15,000 to Rs 30,000 per share. You will need to have substantial amounts to invest in these companies – assuming you choose to invest in such stocks after your own analysis. For fresh investors, especially those in the very early stages of their careers, with limited monthly or periodic surplus, this amount may be too large and out of reach.

For such investors, the Nifty 50 ETF would give exposure even with a very small amount. You can buy one unit of an ETF for a few hundred rupees. For example, the

Nifty 50 ETF trades at a price of Rs 185 on the NSE. You can thus invest as little as Rs 500-1,000 and buy units of the Nifty 50 ETF from the exchange. You can even make systematic investments every month. By doing so you will buy at all market levels and would average the costs of your investments.

Great starting point to explore other equity-related options

By investing in the Nifty 50 ETF, you can start understanding the market dynamics over the years, without taking too many risks early on. When you familiarise yourself with the various factors driving the markets, you can explore small- and mid-cap stocks or mutual funds based on your risk appetite, goals, time horizon and investible surplus.

The tracking error – a measure of the deviation of fund returns from that of the underlying index – of the ICICI Prudential Nifty 50 ETF is 0.03%, which is among the lowest in the Nifty 50 ETF universe. In general, the lower the number, the better.

Thus, the Nifty 50 ETF can be your first investment as you begin your investment journey!

The author is Head – ETF Sales, ICICI Prudential AMC

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)