How to Invest in Nifty - Trading Tips & Strategy

The Nifty 50 is one of India’s broad-market benchmark indices that track the price movements of 50 of the largest companies listed in the National Stock Exchange. It is widely used by traders to gauge the performance of the stock market as a whole.

One of the primary reasons why the Nifty is considered to be a good indicator of the stock market’s performance is due to the fact that it covers companies across 14 different sectors. As a result of this, an investor who invests his capital in the Nifty 50 index can basically expose himself to a diversified range of companies in one go and can in turn reduce his investment risk considerably.

But then, how to invest in Nifty? Since it is an index, you cannot purchase it directly like the stock of a company. However, there are other ways in which you can use the index to profit off its movements. And that’s precisely what we’ll be addressing next.

How to trade in Nifty?

There are two primary ways through which you can invest in the Nifty index - via derivatives and via mutual funds. Let’s take an in-depth look at both of these ways.

Investing in Nifty via Derivatives

Nifty derivative contracts such as futures and options have the said index as the underlying asset. This essentially means that the price movement of the derivatives are linked to that of the index. By trading in these derivatives, you can effectively profit off the price movements of the index.

That said, here’s something that you should note. Since the index is not a stock, you cannot take delivery of the same on the expiry of its derivative contracts. Instead, all of the index derivatives will be mandatorily cash-settled at the end of the expiry.

Now that you’re acquainted with the basic idea of how to invest in Nifty through derivatives, let’s delve a little deeper and try to understand how to trade in Nifty through futures contracts and options contracts.

Investing in Nifty Through Futures Contracts

If you have either a bullish or a bearish view on the Nifty index, you can make use of the index future contracts to profit off the price movements. For instance, let’s assume that Nifty is currently trading at 12,000 on November 01, 2020. You have a bullish view and therefore expect the index to rise to around 13,000 by around the expiry.

Now how to trade in Nifty using futures? Here are some Nifty trading tips. All that you have to do is purchase the Nifty Nov Fut contract at 12,000. And if the index moves according to your expectations and touches 13,000 before the contract expires, you can simply square-off your position and enjoy a profit.

Similarly, let’s now assume that you have a bearish view and therefore expect the index to fall to around 11,000 by around the expiry. What do you do in this case? Can you still make use of index futures? Of course, you can. Here’s a nice little Nifty trading strategy. All that you have to do in this case is short-sell the Nifty Nov Fut contract at 12,000. If the index moves according to your expectations and falls below 12,000 before the contract expires, you can simply square-off your position and enjoy a profit.

Investing in Nifty Through Options Contracts

Just like how you used futures, you can also use Nifty options contracts to profit off the price movements. Let’s use the same example that we used above. Assume that Nifty is currently trading at 12,000 on November 01, 2020. You have a bullish view and so you expect the index to rise to around 13,000 by expiry.

Now how to invest in Nifty using options? Are there any Nifty option tips that you can use? Yes, there is. You purchase a call option contract of the index with a strike price of your choosing. To be more specific, you can purchase the Nifty Nov 13000 CE option contract since you expect the index to move up to around 13,000. Alternatively, you could also purchase the index call option contract with a strike price that’s lower than the currency trading price of the index. But then, you would have to shell out a higher premium for the same, which can drive up your initial investment costs. Upon purchasing a call option contract, if the index moves up in tune with your expectations, all you have to do is square-off your position to enjoy a handsome gain.

Similarly, suppose you have a bearish view and expect the index to fall to around 11,000 levels by expiry. In such a situation, all that you have to do is purchase a put option contract of the index with a strike price of your choice. To be more specific, you can purchase the Nifty Nov 11,000 PE option contract since you expect it to fall to around 11,000. And when the index falls, you can simply square-off your positions and enjoy a gain on your investment.

When it comes to trading in Nifty derivative contracts, these are just some of the Nifty trading tips that you can use. In fact, there’s a plethora of different Nifty trading strategies that you can use to profit off the movement of the index.

Investing in Nifty via mutual funds

Mutual funds like index funds feature the same portfolio of stocks that feature in an index like the Nifty. This effectively allows these funds to track the performance of an index, allowing the investors to take part in the value creation process afforded by the said index. Unlike other mutual funds, index funds are more cost-effective, offer better diversification, and have a greater chance of providing investors with good returns. By investing in Nifty index funds, you would effectively be investing in all the 50 components of the Nifty 50 index, thereby providing you with a broad market exposure.

Conclusion

Although investing in Nifty derivatives is one of the best Nifty trading tips that you can follow, it is tuned more towards the short-term. This is because the maximum amount of time that you can stay invested in a derivative contract is limited to 3 expiry months. And on top of that, derivatives are also significantly riskier and requires you to actively monitor the performance. If you’re looking for a long-term Nifty trading strategy with lower risk and little to no need for regular monitoring, investing in a Nifty index fund would be the best way to go.