Mutual Funds: What is Nifty 500 index and why you should invest in it?

The launch of the Axis Nifty 500 Index Fund enables investors interested in an open-ended index fund that tracks the Nifty 500 TRI. The fund aims to offer a long-term wealth creation solution by investing in a diversified portfolio of Nifty 500 TRI stocks, aiming to mirror their returns closely. For those new to the concept, the Nifty 500 Index monitors the performance of India’s top 500 companies listed on the National Stock Exchange (NSE), chosen based on their market capitalization and trading volume.

Furthermore, the index covers approximately 91.8% of the free float market capitalization of stocks listed on the NSE. It undergoes semi-annual rebalancing to adjust for market changes.

The Nifty 500 index effectively includes companies from all three market capitalization segments. Here is a breakdown of the index based on market capitalization.

• Large caps: These are the largest and most established companies in India, constituting the majority of the weightage in the Nifty 500 (approximately 74.5%).
• Mid caps: These companies are of medium size with growth potential, comprising a notable segment of the index (approximately 16.6%).
• Small caps: These companies are smaller in size and have the potential for rapid growth, but they also carry more risk. They make a minor contribution to the overall index (about 8.9%).

The diversity in market capitalizations within the Nifty 500 makes it a reliable gauge of the overall vitality of the Indian stock market.

Who might benefit from investing in the Nifty 500 index fund?

The Nifty 500 index fund can appeal to various types of investors, with several characteristics that enhance its attractiveness:

• Long-term investors: Despite fluctuations, the stock market tends to trend upward over extended periods. With a horizon of over five years, you can withstand market volatility and potentially capitalize on the growth of the Indian economy.
• Investors looking for diversification: The Nifty 500 provides exposure to a broad array of companies spanning multiple sectors. This diversification can help manage risk, as declines in one sector may be balanced by growth in another.
• Passive investors: Index funds, such as the Nifty 500, are passively managed and seek to replicate the performance of the underlying index. This is suitable for individuals who do not wish to actively select equities or time the market.
• Investors with moderate risk tolerance: The Nifty 500 comprises a blend of large, mid, and small-cap companies. While it offers growth opportunities, it also entails some risk compared to funds focused solely on large-cap companies.

What makes investing in the Nifty 500 Index worthwhile?

The Nifty 500 index presents numerous benefits for investors, making it an appealing choice for those seeking exposure to the Indian stock market:

• Extensive market coverage: While the Nifty 50 focuses on the top 50 companies, the Nifty 500 extends its reach to encompass nearly 93% of the total market capitalization of all listed companies. This provides exposure not only to established large-caps but also to mid-sized and potentially high-growth smaller companies.
• Diversification: Investing in a portfolio of 500 companies helps spread risk. The impact of any single company’s performance on your overall portfolio is reduced compared to investing in fewer stocks.
• Compared to Nifty 50: Over time, the Nifty 500 has demonstrated the ability to outperform the Nifty 50 index, often due to the higher growth potential of smaller companies.
• Enhanced risk-return profile: The Nifty 500 index potentially provides a more favorable balance between risk and return. Although it may exhibit slightly higher volatility compared to the Nifty 50, it also offers the prospect of superior returns.
• Diverse sector exposure: Unlike the Nifty 50 index, the Nifty 500 index spans a broader array of sectors. This enables investors to access growth opportunities across the entire Indian economy, beyond those represented by the largest companies alone.
• Opportunity for long-term wealth growth: A significant number of investors utilize systematic investment plans (SIPs) to invest in Nifty 500 index funds. The SIPs facilitate rupee-cost averaging, smoothing out the cost per unit over time, thereby potentially fostering wealth accumulation in the long run.

While the stock market involves inherent risks and past performance does not guarantee future results, the Nifty 500 index presents a compelling opportunity for investors aiming to diversify and potentially benefit from India’s growth trajectory.