Everything You Need to Know About Nifty 50 ETFs


The inflows into mutual funds -- particularly the equity-oriented ones -- and the rise in AUM, are a testimony to the growing popularity of mutual funds as a wealth creation investment avenue.

Over the last few years, the AUM of passive funds as a percentage of the total AUM of all open-ended funds has jumped from 8% in May 2020 to 17% in May 2023. Among beginners, who look to clock returns in line with the benchmark, the passively managed Exchange Traded Funds and Index Funds, are achieving acceptance.

Graph: Passive funds are gaining traction...

Graph 1
Data as of May 31, 2023
(Source: AMFI, PersonalFN Research)

That being said, compared to the developed markets, passive funds (Exchanged Traded Funds and Index Funds) still constitute a small composition of the Indian mutual fund industry's total AUM. A large portion of the inflows comes from EPFO. For sustained growth of passive funds, investor education shall play a pivotal role besides strengthening the distribution reach and leveraging on technology.

In this article, in aiming at investor education, I shall take you through everything you need to know about Exchange Traded or ETF, particularly the Nifty 50 ETF.


Exchange Traded Fund (ETF)

ETF is a passive offering from the fund house. An ETF invests in a basket of securities such as equities or bonds with the objective to track and replicate the performance of a particular index such as Nifty 50, S&P BSE Sensex, etc. by mirroring their composition. Hence, the returns one can expect would almost be in line with the respective underlying benchmark index.

Note, the fund manager does not take active calls to manage the portfolio. Thus, ETFs entail much lower cost (expense ratio) compared to actively managed mutual fund schemes.

[Read: What Is Expense Ratio in Mutual Funds, And How Is It Calculated?]

Another feature of ETFs is that they are traded on the stock exchange -- just as in the case with stocks.

How to invest in ETFs?

As an investor, you can transact buy (as well as sell) directly on the exchange through your broker. All that is required to transact is your Trading Account and Demat Account.

The price or Net Asset Value (NAV) of the ETF fluctuates throughout the trading session as per the demand. In other words, it's real-time, and the closing NAV is disclosed at the end of the day.

The units can be purchased and sold (intra-day trading is not possible) at the prevailing real-time NAV. The settlement cycle is T+1, allowing money and securities to move in faster. On purchase, money moves out, and units reflect in the demat holding, and on sale vice versa.

This is unlike other mutual fund schemes where transactions take place at the day's closing NAV, and the fund house adds or deletes units in the folio and sends an account statement.

Is there any entry or exit load for ETFs? No, ETFs usually do not carry any entry or exit load. That said, it is important to read the to read scheme-related documents carefully to get information regarding any applicable loads/charges.

The Nifty 50 ETF

The Nifty ETF is an equity-oriented ETF that tracks and aims to mirror the composition and performance of the Nifty 50 TRI (Total Return Index). The TRI takes into consideration the movement in stocks plus dividends paid by the stocks within the index.

Everything You Need to Know About Nifty 50 ETFs
(Image source: freepik.com; Image by Freepik)

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The Nifty 50 Index of the National Stock Exchange, as you may know, is a vital index of the Indian stock market (just like the S&P BSE Sensex). It is the barometer by which the Indian economy can be measured. The Nifty 50 Index is a well-diversified 50 companies index (computed using the free float market capitalisation method) reflecting overall market conditions. It has representation across key sectors of the economy.

Table 1: Sector Representation of the Nifty 50 Index

Table 1
(Source: NSE Indexogram May 2023 factsheet)

The top-10 constituents of the Nifty 50 Index include names such as Reliance Industries Ltd., HDFC Bank HDFC Ltd (the two will merge soon), ICICI Bank, Infosys, and ITC Ltd. among others.

Table 2: Top-10 Constituents of the Nifty 50 Index by Weightage

Table 2
(Source: NSE Indexogram May 2023 factsheet)

A Nifty 50 ETF invests in the same basket of securities as the underlying index. A very small portion of the holdings may be invested in cash, debt, and/or money market instruments to meet liquidity requirements. Overall, the objective of the Nifty 50 ETF is to clock returns in line with the benchmark. The difference in returns (if any) vis-a-vis the underlying benchmark index is owing to a tracking error.

Tracking error or deviation from the returns generated by the underlying index occurs when the ETF holds more cash, debt and/or money market instruments to meet liquidity needs or the weightage of the securities is not equal to the underlying index. Tracking error is calculated against the TRI. Ideally, the returns of the ETF should not stray away much from the underlying index, or in other words, the tracking error should be minimal.

The Quantum Nifty 50 ETF, for example, has one the lowest tracking error of 0.032% amongst its peers. Moreover, it has the lowest expense ratio of 0.08% (excluding statutory levies and taxes).

Here are five keys reasons why investing in Nifty 50 ETFs makes sense for beginners:

1) Allows you to diversify across top companies in different sectors through a single fund.

2) There is transparency about the securities owned by the scheme.

3) Eliminates the unsystematic risk of the fund manager's bet going wrong.

4) Come with a lower expense ratio than actively managed diversified equity funds.

5) Offers enough liquidity.

Having said that, the following care should be taken to choose the Nifty 50 ETF (or any ETF for that matter):

Assess your needs -- While the popularity of ETFs (and Index Funds) is on the rise, and it's a good option for investors, note that they carry high risk. Therefore, assess your risk profile, investment objective, the financial goal being addressed, and the time in hand to achieve the envisioned financial goals. Don't ignore these important facets of need-based investing.

Check the expense ratio -- This is important since it may weigh on the overall portfolio returns in the long run. Thus, prefer a Nifty 50 ETF with a low expense ratio.

Tracking Error -- If the tracking error is very high, the returns of the Nifty 50 ETF will not be in line with the underlying benchmark index. Hence, choose a Nifty 50 ETF with the least tracking error.

What about the tax implication of investing in the Nifty 50 ETF?

Being an equity ETF, the capital gains on redemption or sale of units will be subject to Short Term Capital Gain (STCG) or Long Term Capital Gains (LTCG), as the case may be. For a holding period of less than one year, referred to as Short Term (as per the tax rules), will be taxed at 15% STCG tax. On the other hand, if the holding period is more than a year, referred to as Long Term (as per the tax rules) will be taxed at 10% if the gains exceed Rs 1 lakh in a financial year.

Who should invest in the Nifty 50 ETF?

Given that it is an equity-oriented passive fund, investors with a high-risk appetite and looking to earn returns almost in line with the Nifty 50 TRI may consider investing in the Nifty 50 ETF. For beginners in equity mutual funds, it is a meaningful choice, but make sure to select the ETF prudently considering the factors discussed above. Keep in mind, mutual fund investments are subject to market risk.



What are the risks involved in the Nifty 50 ETF?

The Nifty 50 ETF may be prone to various risks such as market risk, sector-specific risk, inflation risk, liquidity risk, currency risk, etc. along with the chances of high tracking error.

Can I invest in Nifty 50 ETF without a Demat Account?

No. If you do not have a Demat account you can consider other similar passive investment options such as Index Funds and Fund of Funds.

What is the difference between Exchange Traded Funds and actively managed mutual funds?

Exchange Traded Funds and Mutual Funds differ in their functionality and associated risks as follows:

Point of difference Exchange Traded Funds (ETFs) Active Mutual Funds
Transaction ETFs are traded during trading hours of the stock exchange and can be bought and sold at different price points. Mutual Funds are traded at the day's closing net asset value.
Portfolio Management ETFs are passively managed. Active Mutual Funds are actively managed depending on the market conditions and outlook.
Expense ratio Being passively managed, ETFs have a lower expense ratio. In the case of Mutual Funds, the fund manager actively takes investment decisions on behalf of the investors. As a result, the expense ratio is higher.
Flexibility ETFs are freely traded on the exchanges and can be bought and sold at the investor's convenience if they have a Trading & Demat account. Mutual fund units can be bought or sold only by placing a request with the fund house or a mutual fund distributor.
Liquidity ETFs can be liquidated on a real-time basis with T+1 settlement and are subject to liquidity in the respective ETF. Mutual Funds can be liquidated on a T+2 basis (except ELSS which has a lock-in period of 3 years).

What is the difference between Index Funds and Exchange Traded Funds?

Index Funds can be bought directly through an AMC or mutual fund distributor but to buy an ETF investors need to have a trading & Demat account.

All transactions of Index Funds are carried out at the closing NAV whereas ETFs can be purchased and sold at the prevailing real-time NAV.

Generally, the expense ratio of an index fund is slightly higher than that of an ETF, though it is lower than actively managed funds. However, it is important to determine the total cost of ownership when you invest in ETFs, which can include additional expenses such as annual charges for trading account, brokerage on transactions, etc.

In the case of Index Funds, it is the responsibility of the mutual fund house to allocate units for purchase transactions and to honour redemption requests. For ETFs, demand is an important factor that determines the liquidity.

[Read: ETF v/s Index Fund: Which is the Better Passive Investment Option?]

Happy Investing!


ROUNAQ NEROY heads the content activity at PersonalFN and is the Chief Editor of PersonalFN’s newsletter, The Daily Wealth Letter.

As the co-editor of premium services, viz. Investment Ideas Note, the Multi-Asset Corner Report, and the Retire Rich Report; Rounaq brings forth potentially the best investment ideas and opportunities to help investors plan for a happy and blissful financial future.

He has also authored and been the voice of PersonalFN’s e-learning course -- which aims at helping investors become their own financial planners. Besides, he actively contributes to a variety of issues of Money Simplified, PersonalFN’s e-guides in the endeavour and passion to educate investors.

He is a post-graduate in commerce (M. Com), with an MBA in Finance, and a gold medallist in Certificate Programme in Capital Market (from BSE Training Institute in association with JBIMS). Rounaq holds over 18+ years of experience in the financial services industry.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.