Wednesday, October 8, 2008

Invest in Benchmark's Nifty BeES

Buying an index at these levels offers a great opportunity to make good, long-term gains

The turmoil in the US equity markets has had a devastating effect globally and also the Indian equity markets. Sensex has dropped nearly 40 per cent from its highest closing on 8 January. Ideally, when there’s mayhem and bloodshed everywhere and equity prices are dropping, it’s a good opportunity to buy equities at cheaper levels. And what better way to enter the equity markets – if you haven’t already or were waiting for the right time buy – than buying the index itself? Take a look Benchmark Nifty BeES. 

About the fund

Nifty BeES is an exchange-traded fund (ETF) that passively tracks the Nifty index. Like an index fund, ETFs invest their entire corpuses – save a small percentage that it keeps aside as cash – in all the stocks and in exactly the same proportion as they lie in their benchmark indices. Launched in December 2001, Nifty BeES was India’s first exchange-traded fund and comes from a fund house (Benchmark mutual fund) that specialises and manages only exchange-traded funds.

 The Nifty index consists of the 50 most liquid stocks on the national stock exchange. The companies that form a part of Nifty are also considered to be amongst India’s largest and most well-managed companies. Since the value of Nifty BeES will always move in tandem to that of the Nifty, one unit of Nifty BeES will be approximately one-tenth the value of Nifty index. For instance, on 29 September while Nifty closed at 3,850.05, Nifty BeES closed at 387.48. Over the past one year, the difference between its net asset value (NAV) and market price has been 0.04 per cent on an average. 

Why does an ETF make sense?

Typically, an index fund too tracks the index passively and there are a dozen of them in the Indian mutual funds industry. However, I have always recommended that you buy an ETF instead of an index fund. Here’s why.

 Low cost

As Nifty BeES is a passively-managed fund, its expense ratio is much lesser as compared to actively-managed funds that charge as high as 2.50 per cent. Further due to the structure of an ETF, its expense ratio is also lower than traditional index funds. As against index funds that charge as high as 1.50 per cent, Nifty BeES scores over them as well. At 0.50 per cent, its cost structure is the second lowest – after Reliance Banking ETF – amongst equity schemes in the market today.

 Low tracking error

The TE of an index fund is essentially the difference in returns generated by itself and its own benchmark index. The lower the TE, the better is the index fund.

 A low expense ratio and an ETF’s structure are responsible for a low tracking error for Nifty BeES (0.33 per cent as on 31 August). Nifty BeES’s TE is the least amongst all passive funds.

 Anytime trading

Unlike a typical MF scheme that can be bought or sold only at the end of the day’s NAV, you could buy Nifty BeES throughout the day, during market hours.

 How to buy?

You need a demat account to buy Nifty BeES. Also enroll with a stock broker who transacts on the NSE; there are close to 50,000 NSE terminals throughout the country.

There’s no telling as to when the carnage on the stock markets will stop. Already stock market experts are predicting that the worse is not yet over. It’s tough to predict the exact bottom levels; we suggest that you allocate around 50 per cent of your total ETF allocation now. As markets fall further, you can continue to deploy more money in Nifty BeES. 

2 comments:

  1. Dear Mr Adajania,

    Missed your article the last time, but just wanted to know if it makes sense to invest in Nifty BeES right now and from here on. I am looking at a SIP monthly of around 7K and was wondering if Nifty BeES can be a way to build corpus.

    Regards,
    Vivek Nath
    vivek.nath@gmail.com

    ReplyDelete
  2. yes you can invest in Nifty BeES even at these levels. Remember two things: 1) When you invest in equity mutual funds, invest for the long term. Do not look at equity funds for a period of three years. The longer you stay invested, the better are your chances of earning higher returns. 2) Given now that you have decided to stay invested for the long run, do not time the market. You may feel that the markets are overheated, but can you give a guarantee that it will fall and not rise any further? If no, then keep investing a regular sum at regular intervals.

    ReplyDelete

Canadian Rockies: Day 11-13 (Vancouver highlights)

On day #11, I took the ferry and came to Vancouver. Much of Vancouver is filled with Asians. The whole 36 km distance between Tsawwassen Fe...