How to Invest in Nifty - Trading Tips and Strategies

The Nifty 50 is one of India's broadest market benchmark indexes that tracks the price movements of the 50 largest companies listed on the National Stock Exchange. It is widely used by traders to assess the performance of the stock market as a whole.

One of the main reasons why Nifty is considered a good indicator of stock market performance is that it covers companies from 14 different sectors. As a result, an investor who invests in the Nifty 50 Index can expose himself to a variety of companies and, as a result, significantly reduce his or her investment risk.

But then again, how should you invest in Nifty? Because it is an index, you cannot buy it directly like a company's stock. However, there are other ways you can use the index to take advantage of its movement. This is exactly what we will address in this article.

There are two basic ways you can invest in the Nifty Index - through derivatives and mutual funds. Let's take an in-depth look.

Investing in Nifty through derivatives

Nifty derivatives contracts such as futures and options use the index as a primary asset. This basically means that the price movement of the derivative is linked to the index. However, since the index is not a stock, you cannot take delivery of it when its contracts expire. Instead, all index derivatives must be settled cash at the end of the expiration.

With the explanation of this concept, let's go a little deeper and try to understand how you can trade Nifty through futures contracts and options contracts.

1. Investing in Nifty through futures contracts

If you have a bullish or bearish view of the Nifty index, you can use index futures contracts to take advantage of price movements. For example, suppose Nifty is currently trading at 12,000 on November 1, 2021. Your outlook is sharp and therefore the index is expected to rise to about 13,000 by the time it expires.

All you have to do is buy the Nifty NOV FUT deal for 12,000. If the index moves up to your expectations and touches 13,000 before the contract expires, you can easily square your position.

Similarly, let's assume that your outlook is bearish and therefore the index is expected to fall close to 11,000 by the time it expires. All you have to do is sell the Nifty NOV FUT contract at 12,000 for a short time. If the index moves ahead of your expectations and falls below 12,000 before the contract expires, you can easily close your position and enjoy the profit.

2. Investing in Nifty through option contracts

Like futures, you can also use nifty option contracts to take advantage of price movements. Let's use the same example as above. Suppose Nifty is currently trading at 12,000 on November 1, 2021. Your outlook is fast and so you expect the index to grow to around 13,000 near expiration.

Therefore, you buy the index call option contract with the strike price of your choice. For further explanation, you can buy Nifty Nov 13000 CE option contract as you expect the index to go up to around 13,000. Alternatively, you can buy an index call option contract with a strike price that is lower than the current trading price of the index. However, you will have to pay a higher premium for this, which may increase the cost of your initial investment. When buying a call option contract, if the index grows as you expect, all you have to do is square your position.

Similarly, if you have a negative outlook and you expect the index to fall close to 11,000 by the time it expires, you should buy the index's put option contract with the strike price of your choice. For further explanation, you can buy Nifty November 11,000 PE option contract as you expect it to fall close to 11,000. When the index falls, you can easily close your positions and enjoy the return on your investment.

Investing in Nifty through Mutual Funds

Mutual funds such as index funds have the same portfolio of stocks as indexes like Nifty. This allows these funds to effectively track the performance of the index, allowing investors to participate in the process of creating value provided by the index. Unlike other mutual funds, index funds are more cost effective, offer better diversification, and have a better chance of providing good returns to investors. By investing in Nifty Index funds, you will effectively invest in all 50 components of the Nifty 50 Index, giving you a wider market exposure.

Result

Although investing in nifty derivatives is one of the best ways to trade, it is a short-term strategy. This is because the maximum time investment in your derivative agreement is limited to 3 months of expiration. Furthermore, derivatives are also significantly more dangerous and require active monitoring of performance. If you are looking for a low risk long term Nifty trading strategy and do not need regular monitoring, then investing in Nifty Index Fund will be the best option.