Fiscally Fit
A safe bet
SHYAM P.
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Let’s look at ways to reap better returns from the stock market...
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The 50 stocks that constitute the NIFTY Index represent 21 sectors of the economy and make up nearly 70 per cent of the total market value of all stocks listed on the Exchange.
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 and when to sell, this instrument helps you reap better than average returns without the associated headache.
In my previous article, I had discussed the simple way to ensure profitability in stock market investing, buying when the P/E ratio (price to earnings ratio) of the index is below 15 and selling when the P/E ratio rises above 25 (the P/E of the NIFTY Index as on December 26, 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 sprang 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.
Too many options
With so many options available, how does one decide where to invest? One option is to use the trial and error approach, 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 per cent 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 285.70 (based on December 26, 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 specialised or sector specific mutual funds (e.g. Real Estate and 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 the 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 per cent 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
P.S. For those who wrote in expressing your grievance about the column’s premature demise, I quote: “Rumours of the column’s death have been greatly exaggerated”. Wish you a Happy and Fiscally fit 2009.
The author can be reached at shyamscolumn@gmail.com or www.shyamscolumn.com
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