Published in The Hindu - Sunday Magazine on Jan 4, 2009
The NIFTY Exchange-traded Index-fund offers a low-risk alternative to stock picking and mutual fund selection. Coupled with a simple rule to decide when to buy & when to sell, this instrument helps you reap better than average returns without the associated headache.
.
.
“Tall Decaf Double Expresso, one shot low-fat cream, no milk, extra foam” – this is a regular customer order at Starbucks (Starbucks is a popular coffeehouse chain in the United States). Every word in the order indicates a choice made by the customer, from the multitude of options available. If you are not sure about your preferred concoction (I mean memorized it), the consequences are: a) you get stared at, as if you were from another planet b) you are put through a rapid-fire of multiple-choice questions to which you need to guess the right answers c) just because you paid for it, you end up having to finish a 200 ml serving of unsatisfactory coffee (out of a super-size mug) that you never intended to order in the first place. I really wonder: what’s the purpose of racking your brains by making six decisions just to buy one cup of coffee
Tall, Grande, Venti, Misto, Americano, light roast, dark roast, pike-place roast, caf, decaf, low-fat, non-fat, cream, milk, foam – with so many permutations and combinations possible, it is not uncommon for the uninitiated to burn a hole in the pocket, in search of an output that is at least mildly close to the simple filter-coffee, which one takes for granted back home. The curse of choice only gets worse when you walk into a grocery store: 5 types of milk, 6 types of orange juice, 7 types of bread, 8 types of cheese and the list goes on. Back in India, I am glad we have not yet reached the level of ‘sophistication’ (or ‘confusion’, depending on how you feel) that our American friends take pride in. But it appears we are soon catching up - if not with our own Café Coffee Day, at least with our investments.
In my previous article, I had discussed the simple way to ensure profitability in stock market investing, is to buy when the P/E ratio (price to earnings ratio) of the index is below 15 and sell when the P/E ratio rises above 25 (the P/E of the NIFTY Index as on 26th Dec 2008 is 12.5). But after having decided when to invest in the stock market, the increasingly complex question is - where to invest? Thanks to the number of IPOs and NFOs that sprung up over the last four years, today we have around 1300 stocks traded in the National Stock Exchange (an even greater number is available in the Bombay Stock Exchange), 400 odd equity mutual fund schemes and of course there are the ULIPs (Unit Linked Insurance Plans), which are basically mutual funds wrapped with insurance cover.
With so many options available, how does one decide where to invest? One option is to use the trial and error approach (similar to my coffee experience), but given our commitments and our rather restrictive lifespan - I don’t think you would want to experiment with your hard-earned (and even harder to save) money. The other option is to listen to the ‘analysts’, but with the abundance of ‘buy’ recommendations out there, you will either need cartloads of money to invest in every recommendation or you have to use your gut feel (my neighbour thinks numerology is quite effective) to decide on which recommendations to bet your money on. Those who think they can do a better job than the ‘analysts’, can of-course conduct their own financial analysis before deciding which stock or mutual fund to buy – but I doubt if many have the time for this.
Wouldn’t it be great if there were just a single investment instrument, through which you can safely invest in the stock market? Luckily there is one, and it is called the NIFTY BeES (Benchmark Exchange-traded Scheme) – one of the largest and most liquid exchange traded funds (ETF) in India. The price of one unit of this fund (akin to your mutual fund’s NAV) is equivalent to 1/10th the value of the NIFTY Index. When the value of the NIFTY Index appreciates, the fund’s price goes up proportionately and vice versa. Through the NIFTY BeES, one can directly buy the NIFTY Index.
What’s the benefit in buying the NIFTY Index? The NIFTY Index (similar to the Bombay Stock Exchange’s Sensex) is the flagship index of the National Stock Exchange of India – the largest stock exchange in the country in terms of number of transactions. The value of the NIFTY Index represents the weighted-average share price of some of the largest companies listed on the Exchange. These include pretty much all the front-runners of our economy. The 50 stocks that constitute the NIFTY Index represent 21 sectors of the economy and make up nearly 70% of the total market value of all stocks listed on the Exchange! Buying the NIFTY Index is equivalent to buying the shares of all these 50 companies put together. The NIFTY BeEs helps you do just that but with minimal investment e.g. if you were to buy one share in each of the 50 stocks in the NIFTY Index, you would have to shell out Rs 21,725 as the minimum investment, whereas one unit of the NIFTY BeES is available for just Rs 285.7 (based on Dec 26th, 2008 - closing price)
Why is the NIFTY BeES safer than any single stock investment?
Well, the answer is simple. Individual stocks are subject to stock specific risk (e.g. the promoter could suddenly mistake his company to be his personal ATM, such as what happened with Satyam Computers) or sector specific risk (e.g. the impact of oil price slump on Reliance Industries). Since the NIFTY represents multiple stocks across multiple sectors, you are well diversified.
Why is the NIFTY BeES safer than a mutual fund?
First, there is an increasing number of specialized or sector specific mutual funds (e.g. Real Estate & Infrastructure only), which actually go against the basic concept of mutual funds i.e. diversification. By investing your money only in the ‘hot’ sectors, these funds actually expose you to the risk of incurring significant losses in the event of a ‘bubble burst’ (remember the Real Estate bubble in the U.S.). The NIFTY Exchange-traded Index fund on the other hand, ensures that cross-sector diversification is achieved. Broad-based mutual funds that take a balanced approach to investment also provide good diversification benefit, but at a comparatively higher cost.
Second, the returns from a mutual fund are partly dependent on stock selection ability of the Fund Manager. When a fund manager leaves, one cannot guarantee if past performance of the fund (based on which you would have invested your money) is likely to repeat itself. Moreover, as an investor it is impossible for you to know what stocks the fund would invest in, pre-facto. Whereas in the NIFTY BeES, the investor knows exactly where his money will be invested – in the 50 stocks that make up the NIFTY Index! You too can check out what stocks constitute the NIFTY Index by following the trail: www.nseindia.com> Indices> IISL Indices> S&P CNX Nifty
What about entry and exit load?
There is no entry or exit load for the NIFTY BeES, and the annual expense ratio at 0.5% is among the lowest compared to other mutual funds.
Any other advantages compared to regular mutual funds?
Mutual fund investments can be made only based on the day’s closing NAV. Exchange traded funds can be bought or sold at any point during the day at prevailing Index levels. This means you could also trade intraday (not that I recommend this).
Okay, I am convinced – how can I buy the NIFTY BeES?
Buying and selling is very easy. You just need to have a demat account - your stockbroker can open this for you. You may then call your broker over phone or use your online trading account to buy and sell units of the scheme, just like any other stock. The NSE code of the fund is NIFTYBEES. For more details on the NIFTY BeES, visit www.benchmarkfunds.com
Tall, Grande, Venti, Misto, Americano, light roast, dark roast, pike-place roast, caf, decaf, low-fat, non-fat, cream, milk, foam – with so many permutations and combinations possible, it is not uncommon for the uninitiated to burn a hole in the pocket, in search of an output that is at least mildly close to the simple filter-coffee, which one takes for granted back home. The curse of choice only gets worse when you walk into a grocery store: 5 types of milk, 6 types of orange juice, 7 types of bread, 8 types of cheese and the list goes on. Back in India, I am glad we have not yet reached the level of ‘sophistication’ (or ‘confusion’, depending on how you feel) that our American friends take pride in. But it appears we are soon catching up - if not with our own Café Coffee Day, at least with our investments.
In my previous article, I had discussed the simple way to ensure profitability in stock market investing, is to buy when the P/E ratio (price to earnings ratio) of the index is below 15 and sell when the P/E ratio rises above 25 (the P/E of the NIFTY Index as on 26th Dec 2008 is 12.5). But after having decided when to invest in the stock market, the increasingly complex question is - where to invest? Thanks to the number of IPOs and NFOs that sprung up over the last four years, today we have around 1300 stocks traded in the National Stock Exchange (an even greater number is available in the Bombay Stock Exchange), 400 odd equity mutual fund schemes and of course there are the ULIPs (Unit Linked Insurance Plans), which are basically mutual funds wrapped with insurance cover.
With so many options available, how does one decide where to invest? One option is to use the trial and error approach (similar to my coffee experience), but given our commitments and our rather restrictive lifespan - I don’t think you would want to experiment with your hard-earned (and even harder to save) money. The other option is to listen to the ‘analysts’, but with the abundance of ‘buy’ recommendations out there, you will either need cartloads of money to invest in every recommendation or you have to use your gut feel (my neighbour thinks numerology is quite effective) to decide on which recommendations to bet your money on. Those who think they can do a better job than the ‘analysts’, can of-course conduct their own financial analysis before deciding which stock or mutual fund to buy – but I doubt if many have the time for this.
Wouldn’t it be great if there were just a single investment instrument, through which you can safely invest in the stock market? Luckily there is one, and it is called the NIFTY BeES (Benchmark Exchange-traded Scheme) – one of the largest and most liquid exchange traded funds (ETF) in India. The price of one unit of this fund (akin to your mutual fund’s NAV) is equivalent to 1/10th the value of the NIFTY Index. When the value of the NIFTY Index appreciates, the fund’s price goes up proportionately and vice versa. Through the NIFTY BeES, one can directly buy the NIFTY Index.
What’s the benefit in buying the NIFTY Index? The NIFTY Index (similar to the Bombay Stock Exchange’s Sensex) is the flagship index of the National Stock Exchange of India – the largest stock exchange in the country in terms of number of transactions. The value of the NIFTY Index represents the weighted-average share price of some of the largest companies listed on the Exchange. These include pretty much all the front-runners of our economy. The 50 stocks that constitute the NIFTY Index represent 21 sectors of the economy and make up nearly 70% of the total market value of all stocks listed on the Exchange! Buying the NIFTY Index is equivalent to buying the shares of all these 50 companies put together. The NIFTY BeEs helps you do just that but with minimal investment e.g. if you were to buy one share in each of the 50 stocks in the NIFTY Index, you would have to shell out Rs 21,725 as the minimum investment, whereas one unit of the NIFTY BeES is available for just Rs 285.7 (based on Dec 26th, 2008 - closing price)
Why is the NIFTY BeES safer than any single stock investment?
Well, the answer is simple. Individual stocks are subject to stock specific risk (e.g. the promoter could suddenly mistake his company to be his personal ATM, such as what happened with Satyam Computers) or sector specific risk (e.g. the impact of oil price slump on Reliance Industries). Since the NIFTY represents multiple stocks across multiple sectors, you are well diversified.
Why is the NIFTY BeES safer than a mutual fund?
First, there is an increasing number of specialized or sector specific mutual funds (e.g. Real Estate & Infrastructure only), which actually go against the basic concept of mutual funds i.e. diversification. By investing your money only in the ‘hot’ sectors, these funds actually expose you to the risk of incurring significant losses in the event of a ‘bubble burst’ (remember the Real Estate bubble in the U.S.). The NIFTY Exchange-traded Index fund on the other hand, ensures that cross-sector diversification is achieved. Broad-based mutual funds that take a balanced approach to investment also provide good diversification benefit, but at a comparatively higher cost.
Second, the returns from a mutual fund are partly dependent on stock selection ability of the Fund Manager. When a fund manager leaves, one cannot guarantee if past performance of the fund (based on which you would have invested your money) is likely to repeat itself. Moreover, as an investor it is impossible for you to know what stocks the fund would invest in, pre-facto. Whereas in the NIFTY BeES, the investor knows exactly where his money will be invested – in the 50 stocks that make up the NIFTY Index! You too can check out what stocks constitute the NIFTY Index by following the trail: www.nseindia.com> Indices> IISL Indices> S&P CNX Nifty
What about entry and exit load?
There is no entry or exit load for the NIFTY BeES, and the annual expense ratio at 0.5% is among the lowest compared to other mutual funds.
Any other advantages compared to regular mutual funds?
Mutual fund investments can be made only based on the day’s closing NAV. Exchange traded funds can be bought or sold at any point during the day at prevailing Index levels. This means you could also trade intraday (not that I recommend this).
Okay, I am convinced – how can I buy the NIFTY BeES?
Buying and selling is very easy. You just need to have a demat account - your stockbroker can open this for you. You may then call your broker over phone or use your online trading account to buy and sell units of the scheme, just like any other stock. The NSE code of the fund is NIFTYBEES. For more details on the NIFTY BeES, visit www.benchmarkfunds.com
Wish you a Happy and Fiscally Fit 2009
6 comments:
Hi Shyam,
That's a good one!! It would definitely help the investors. But, i have couple of questions. Why you have not quoted about Gold ETFs. In today's market tatz the one which give hedging over the inflation. Why you have mentioned only Benchmark Nifty Index Funds. There are Nifty funds availale from peers like UTI, Tata, HDFC etc.,
Why you have not quoted about Gold ETFs?
> This piece is an extension of the previous article and the scope was restricted to investing in the "stock market"
> I believe that the safety of your investment in ANY ASSET is determined by the PRICE you pay for acquiring that asset - Although Gold may be a known as a capital protector, 2 reasons why I would not invest in 'gold' today:
1. If you look at the last 20 yr data, gold prices peak when the stock prices hit bottom. Long term (10+yrs)Average returns from equity markets> returns from Gold.
2. The rush to safety - from stocks, has created a craze for 'gold' which has basically lead to run-up in gold prices.
Although 'Gold' is still a 'valuable' commodity, by paying extraordinary price to buy it - investors are setting themselves up for failure again.
check out this link: 'Swiss mines can't make enough Gold to satiate the surge in demand'
http://www.reuters.com/article/companyNewsAndPR/idUSLI46181820081217
Investors have rarely made MONEY by buying 'something' that's engulfed in euphoria. Too much euphoria leads to a 'bubble' & a bubble to a 'burst'
Why you have mentioned only Benchmark Nifty Index Funds?
> The Benchmark Nifty has the lowest tracking error (i.e. deviation from the actual Nifty Index) and also the lowest fee.
Check this link for a comparison of all Index Funds:
http://ajayshahblog.blogspot.com/2008/08/choosing-nifty-index-fund.html#links
Hello sir,
Your Columns are very much useful to me. I have a question to ask you. You recommend to invest in 'NiftyBeES'. But, other mutual funds have shown a better performance than Nifty over the years. So, I am not clear whether investing in NiftyBeEs is better than a star rated Mutual fund.
Please clarify.
Regards,
T G Saravanan
saravanan_t_g_s@yahoo.com
Saravanan, I agree there are some mutual funds that have performed well over the long term - better than NIFTY. But the problem is that part of this performance is attributable to fund managers who are likely to change. this could have an impact on performance. Secondly these days there is such a proliferation of funds, that you cannot really take a look at the "star rating" that is given based on recent performance and put your money in a scheme. e.g. Principal PNB had a fund that was a Super Star rated fund in the bull market upto Jan 2008. But due to their excessive exposure in mid-cap stocks, today they are in bottom quartile of performance having incurred deep losses (more than other funds or the NIFTY). So there could be a lot of variance in performance of the funds and one cannot really predict with 100% confidence that the fund will continue to outperform the market 5 yrs into the future. The NIFTY BEES relieves you from this uncertainity by cutting through the clutter & offering a single clear and simple alternative to reap modest but above average gains in the equity markets. Over the long term I think you'll be happy having reaped 600-700 basis points above fixed desposit returns, rather than shooting for 1000 basis points with a star mutual fund that may or may not pan out. NOTE: although the capital gain (after 1yr minimum holding period) at the time of selling your ETF investments such as NIFTY BEES is tax free, you do not qualify for tax deduction under 80c , for the invested amount. If you are seeking annual tax deduction on your invested amount, then you may have to choose a qualified ELSS mutual fund anyway.
Dear Shyam
Can NIFTY BEES be purchased or sold if one has a trading account with say HDFC securities?
Best regards
Harish Jaisingh
Harish - must be. talk to your customer service rep.
Post a Comment