Mechanism of Nifty Index
There are more than 2000 companies listed on NSE Exchange. The company that holds the highest free-float market capitalization becomes the no. 1 company on NSE. The Nifty Index is a portfolio of such top 50 Companies. Now based on market capitalization, each company gets its weight in Index. That means the company with the highest market capitalization got the highest weight in the portfolio. There are other rules, too but the above mention is fair enough for a simple understanding of Index.
Nifty Index started from 1000 points in 1996 under the same rules. Now NSE revises the index every quarter and revises the weight of all the companies. If 50th companies market cap falls down more than 51st company, then it will automatically go out from Nifty Index and the new company enters in the portfolio. Hence, the only performing companies remain in the index.
Now let’s come back to the main question….
In which the Indian company’s stock should you invest for the long term?
After analyzing the mechanism of Nifty Index, now we understand that Nifty will never get ZERO in value. Nifty automatically removes the non-performing companies from its portfolio. On the second hand, it also gives more weight to top-performing companies.
If you want to invest in companies that are going to be No. 1 in the future, then invest in the Nifty Index. You will always have the best companies in your portfolio. You don’t need to have any fundamental or technical knowledge for the investment.
Now the question is how to invest in Nifty?
Generally, you can buy Nifty ETFs or invest in funds. Even small investors can also start their investments with NiftyBEES. You can purchase NiftyBEES the same as like you are purchasing equities of Reliance, TCS, or HDFC Bank.
The advantage of Nifty is that hedging is also available for its investment at a very cheap rate. You can secure your portfolio against worst market situations with such hedging.
To get more information about hedging and strategy, you can watch the detailed explanation by FinIdeas in the following video: