Blue-chip stocks are like family treasures. Stocks of well-known companies should be kept for the long term, ideally to pass down to the next generation. The Nifty50 index houses some of these top-notch companies. Investments in units of an exchange traded fund (ETF) that tracks Nifty 50 index make a bedrock for a long-term equity portfolio.
Investing in large cap stocks for long term directly or through an actively managed mutual fund with a view to beat the market is a tough call, is a tough task. As these stocks are widely tracked by analysts, the chance of outperforming the benchmark Nifty 50 index is low. As per SPIVA India scorecard, S&P BSE 100 index has beaten 87.5% and 85.71% of the actively managed large cap equity schemes in India, over three and five years ended December 31, 2023, respectively.
Given these facts, it is better to earn closer to index returns, than to run the risk of significantly underperforming the index. An index ETF tracking Nifty 50 index makes sense for most investors. Companies entering the Nifty50 index have a proven track record. Many of these have strong balance sheets. Investors can expect them to continue with their good performance. Nifty 50 index is constructed using free float market capitalisation. Hence, relatively large companies by free-float market capitalisation get large weights in the index. Free float market capitalisation is computed by multiplying the number of non-promoter shares by the market price of the share. However, the market price of the share need not be the true worth of the stock. Hence, some investors frown at the methodology. Such investors may prefer other strategies devised using the constituents of Nifty 50 index.
