Nifty BeES
Making Risk-Less Profits
Rama Krishna Vadlamudi
MUMBAI
September 30th, 2009
(You can read this comprehensive blog on reader-friendly Scribd)
NIFTY BeES (Nifty Benchmark Exchange Traded Scheme) is a mutual fund
product, but it is traded on NSE like any company’s share. It is an open-ended
mutual fund scheme. Like a share, one can buy/sell units of Nifty BeES on NSE (National Stock Exchange) throughout the trading hours. NIFTY BeES is traded in demat
form only. One can buy NIFTY BeES from NSE through one’s broker and the units will be
credited to one’s demat account on normal T+2 basis. If one desires, one can
sell the units again through NSE anytime during the trading hours.
EXCHANGE-TRADED FUND (ETF):
An
ETF is basically an index mutual fund scheme with a little difference.
The
main difference between an index fund and an ETF is this: an ETF is always listed
and traded on an exchange; whereas an index fund has to be bought/sold directly
with the particular Mutual Fund company or through a mutual fund
agent/distributor.
An
ETF is linked to a benchmark index like any index fund.
An
ETF can be bought and sold through an exchange like any share.
To
buy an ETF, one requires a demat account and a trading account with a broker to
buy/sell on the particular exchange where the ETF is listed/traded; whereas for
buying an index fund, investor does not require a demat account and she can
directly approach the mutual fund for buying or selling the index fund units.
SALIENT FEATURES OF NIFTY BeES:
One
unit of NIFTY BeES is equal to one-tenth of the value of S&P CNX Nifty Index.
On 29.09.09, Nifty 50 index has closed at 5,007; whereas, NIFTY BeES was
quoting at Rs 498 on day’s closing. The small difference (technically called
tracking error) between the underlying Nifty index and NIFTY BeES is due to the
supply and demand factors of NIFTY BeES on NSE. On 29.09.09, its day’s high was
Rs 500 and day’s low was Rs 495. During the trading hours, the price of NIFTY
BeES will fluctuate in tune with the movement of Nifty 50 index.
If
the NIFTY Index goes up to 6,000 in the next six months, the value of one unit
of NIFTY BeES will go up to Rs 600 or if the Nifty Index retraces to 4,500, then
the value of one unit of NIFTY BeES will be readjusted to Rs 450 in tune with
the movement of the general market.
The
structure of Nifty BeES is such that it does not hurt long-term investors from
the inflow and outflow of short-term investors. This is because the Fund does
not bear extra transaction cost when buying / selling due to frequent
subscriptions and redemptions.
It is
traded only on the NSE (face value Rs 10) & it is India
It is
managed by the AMC of Benchmark Mutual Fund, which is sponsored by one Niche
Financial Services Pvt. Ltd. The fund manager is Vishal Jain. This Mutual Fund
maintains other ETFs also – like, Gold, Bank, Derivatives and others. The total
average assets under management by the Benchmark MF are Rs 1,213 crore as on 31st
of August, 2009.
Entry
Load is NIL.
Exit
Load: With effect from August 01,
2009, Exit load (technically referred as CDSC) (if any) of up to 1% of the
redemption value charged to the unit holder on redemption of units shall be
retained by each of the Schemes in a separate account and will be utilized for
payment of commissions to mutual fund advisors and to meet other marketing and
selling expenses.
It is
open-ended mutual fund.
For
tax purposes, it’s considered as an equity-oriented mutual fund. Long-term
capital gains tax (for holdings of more than one year) is NIL.
Short-term
capital gains tax (for holdings of less than one year) is 15 per cent, plus
surcharge (if any) and 3% education cess.
STT
is applicable for buying and selling of units of NIFTY BeES on NSE.
As
NIFTY BeES is bought from NSE like any share, brokerage needs to be paid by the
investor for buy/sell transactions.
Dividend
distributed by AMC for NIFTY BeES is exempted from Dividend Distribution Tax
(DDT). Dividend is not taxable in the hands of individual resident Indian tax
payers. Benchmark AMC declares dividends on NIFTY BeES, now and then. The
latest dividend was Rs 4.50 per unit of NIFTY BeES paid with record date of
15.07.09. Previously dividends were Rs 5.00 (12.09.08) and Rs 8.00 (05.01.07).
NSE
symbol is NIFTY BEES.
NIFTY
is calculated using the Free Float methodology.
Fifty
stocks that are part of NIFTY Index are selected based on high degree of liquidity.
Assets
under management as on 31.08.2009 for NIFTY BeES: Rs 214 crore. As on September
29th, 2009; a total of 47.37 lakh units of NIFTY BeES are issued to
investors.
It is
highly liquid from an individual investor’s point of view.
NIFTY
BeES is a passively managed fund. NIFTY BeES’s underlying will be in proportion
to the weight of the constituents of Nifty 50 index.
Total
expense ratio of NIFTY BeES is 0.50%, which is one of the lowest in the
universe of index funds managed by all mutual funds in India.
Tracking
error of NIFTY BeES is 0.26% annualized. It is the lowest among all index
funds. Tracking error is the difference between NIFTY BeES and its benchmark
index, that is, S&P CNX Nifty. The tracking error occurs due to some
factors, like: a small component of cash in the fund, difference in weights
between the fund and the underlying index, etc. The tracking error of 0.26% is
negligible from individual investor’s point of view.
Trading
of NIFTY BeES has been going on since its inception on NSE on 28.12.2001.
All
types of investors – whether retail or institutional – can invest.
NIFTY
BeES has been consistently outperforming (to an extent of one to two per cent)
its benchmark Nifty 50 index for several years.
NIFTY BeES
PERFORMANCE (as on 29th of September 2009):
% RETURN
|
3-month
|
1-year
|
2-year
|
3-year
|
5-year
|
Since inception
|
13.15
|
29.54
|
-0.01
|
12.29
|
24.61
|
22.84
|
|
NIFTY BeES
|
||||||
14.03
|
30.05
|
-0.14
|
11.74
|
23.71
|
-- NA --
|
|
Benchmark*
|
||||||
Source: ValueResearch
* Benchmark is S&P CNX NIFTY
INDEX
Returns upto 1-year are absolute
& above 1-year compounded annual growth rate-CAGR
CHART
SHOWING ONE-YEAR RETURN FROM NIFTY BeES:
Source: NSE. Data as on September
29, 2009. One-year price chart.
In
just 11 months, it jumped by 100%! You
may not believe it, but it’s true.
CHART SHOWING ONE-YEAR
VOLUMES FROM NIFTY BeES (on NSE):
Source: NSE. Data as on September
29, 2009
WHAT IS THE REPRSENTATION
OF NIFTY BeES’ TOP 10 HOLDINGS:
Data is as on Aug. 31,
2009 Source: ValueResearch
The data on
the right side of the above table gives an idea about the top holdings of an
investor who is holding NIFTY BeES units worth Rs 5 lakhs on a given day, that
is, August 31st, 2009. By buying units worth Rs 5 lakh, you’re indirectly
holding Rs 0.56 lakh of RIL, Rs 0..40 lakh of Infosys, Rs 0.36 lakh of L&T
and so on.
TOP FIVE
SECTORAL HOLDINGS OF NIFTY BeES:
Source: ValueResearch Data as on Aug. 31,
2009
Note:
Energy-RIL, ONGC, etc; Financials-ICICI Bk, HDFC, SBI, Axis Bk, etc;
Technology-Infoysy, TCS, etc; Diversified-L&T, Grasim, etc; and Metals-Tata
Steel, Sterlite Inds, Jindal S&P, etc
BUYING/SELLING
NIFTY BeES DIRECTLY
WITH THE
BENCHMARK MUTUAL FUND:
An investor can
buy or sell minimum 10,000 units of Nifty BeES and in multiples thereof directly
with the Benchmark Mutual Fund. This route is usually used by High Networth
Individuals (HNIs) and institutions to buy this exchange-trade product. It is
very convenient for corporates also.
Minimum Lot Size : 10,000 units
Price :
In exchange for a basket of Nifty securities and cash defined as “Creation Unit”
Eligibility :
Authorised participant or large institutions
For more on this ‘Creation Unit’, HNIs and institutions can visit: weblink
THREE
IMPORTANT RISKS:
1)
MARKET RISK: The returns of this fund are linked to
the movement of stock markets in India
2)
LIQUIDITY RISK: If sufficient volumes are not available
on the exchange for the product, investors may not be able to buy new units/liquidate
their holdings easily in the market and as such this investment involves
liquidity risk (for small individual investors, this is not a problem at all).
3)
TRACKING ERROR RISK: The fund may not be able to invest the
entire corpus in the same proportion as in the underlying S&P CNX Nifty
Index due to certain factors such as: expenses incurred by the fund, corporate
actions, cash balances, dividend payouts, changes in the underlying index and
regulatory policies.
MY
OPINION & SUMMARY:
NIFTY BeES is a low-risk financial product (low-risk compared to
individual stocks). It provides reasonable returns with ‘below average’ risk.
It is a very simple and easy to understand product. As the risk is lower,
returns from NIFTY BeES will also be normal unlike shares which have the
potential to be multi-baggers.
As the
number of fund managers, mutual fund houses and number of schemes are
increasing by leaps and bounds every day, it would be difficult for fund
managers to outperform the indices (like, Nifty, Sensex, BSE-500) on a sustained
basis in the long-term (The author does not have any solid data to back his
opinion).
Finding new stock ideas year after year is next to impossible in these
times of greater higher volatility and abounding global uncertainties.
As the NIFTY BeES represents the country’s top fifty companies on
NSE through the Nifty 50 index, it would be very easy and convenient for
individual investors to buy the stock market in its entirety without bothering
much about the wild movements in the fortunes of individual company’s
performance.
However, one needs to keep in mind one’s overall asset allocation,
individual’s need for liquidity and to have a broad outlook on market dynamics,
prevailing sentiment, country’s economic situation, global factors, corporate
performance, regulatory risks, political risks, etc.
By investing through NIFTY
BeES, individual investors will be relieved of the burden of poring over bulky
annual reports, opaque financial statements, analyzing quarterly/periodical
results minutely and scratching one’s head over declarations of bonus shares,
dividends, rights issues, open offers, stock splits, etc.
It is a good start
with 15 or 25 per cent allocation for ETFs in one’s equity portfolio for
individual investors who like passive investments.
NIFTY BeES, as of now and according to the present available
information, is much superior to other index funds* that are available to
investors.
(*These index funds can only be bought directly from mutual fund
houses and not through stock exchanges; and these index funds have unreasonable
tracking errors which may dilute the overall returns in the medium/long term)
P.S: For
further information, please visit: www.nseindia.com, www.benchmarkfunds.com,
www.valueresearchonline.com
and www.vanguard.com. The above analysis
is made keeping in mind the needs of individual investors. Mutual fund
performance is subject to market risk and as such investors should do their own
due diligence before start trading in NIFTY BeES.
Benchmark Mutual Fund was taken over by Goldman Sachs and it's now called Goldman Sachs Mutual Funds. Hence, Nifty BeES' is now officially known as Goldman Sachs Nifty Exchange Traded Scheme.
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