Junior Nifty Bees-how To Make Higher Profits-vrk100-06112009
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Rama Krishna Vadlamudi
November 6th, 2009
Junior Nifty Bees one-year return 120
Rs
100 80 60 40
Source: NSE. Data as on November 5, 2009.
11/5/2009
10/5/2009
9/5/2009
8/5/2009
7/5/2009
6/5/2009
5/5/2009
4/5/2009
3/5/2009
2/5/2009
1/5/2009
12/5/2008
11/5/2008
20 0
In just 11 months, it jumped by 120%! It’s unbelievable, true.
THE BEST OF MY STUFF ON
Reads
http://www.pdfcoke.com/vrk100
1. Income Tax Slabs 2009-10 for Salaried Class
2 027
2. Direct Taxes Code Bill 2009
964
3. Public Provident Fund PPF ac-Little Known Facts
921
5. Good and Services Tax-GST-an introduction
656
4. Interest Rate Futures-NSE launches IRFs
644
6. Nifty Bees-Exchange Traded Fund
553
TOTAL READS CROSSED 12,500! Rama Krishna Vadlamudi, MUMBAI. www.pdfcoke.com/vrk100 Please read author’s disclaimer at the end.
Nov. 6, 2009
Page 1 of 9
NIFTY JUNIOR BeES (Nifty Junior Benchmark Exchange Traded Scheme) is a mutual fund product, but it is traded on NSE throughout the trading day like any company’s share. It is an open-ended mutual fund scheme. Like a share, one can buy/sell units of NIFTY JUNIOR BeES on NSE (National Stock Exchange) throughout the trading hours. JUNIOR NIFTY BeES is traded in demat form only. One can buy JUNIOR NIFTY BeES from NSE through one’s broker and the units will be credited to one’s demat account on T+2 basis. If one desires, one can sell the units again through NSE anytime during the trading hours. Junior Nifty Bees Daily Volumes 800.00 700.00
Rs lakhs
600.00 500.00 400.00 300.00 200.00
11/5/2009
10/5/2009
9/5/2009
8/5/2009
7/5/2009
6/5/2009
5/5/2009
4/5/2009
3/5/2009
2/5/2009
1/5/2009
12/5/2008
0.00
11/5/2008
100.00
Source: NSE. Data as on November 5, 2009. One-year volume chart.
What is an Exchange-Traded Fund? Before we plunge right into Junior Nifty Bees, let us examine a little about ETFs
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
Rama Krishna Vadlamudi, MUMBAI. www.pdfcoke.com/vrk100 Please read author’s disclaimer at the end.
Nov. 6, 2009
Page 2 of 9
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
What are the Components of CNX Junior Nifty? Junior Nifty BeES ETF is based on CNX Nifty Junior Index of the NSE. There are 50 stocks in it. It can be said that they are the most liquid stocks after those 50 stocks that are part of the benchmark S&P CXN Nifty of the NSE, Mumbai, India. NSE selects these fifty stocks in CNX Nifty Junior based on market capitalization, volumes and liquidity. The stocks that appear in Nifty Junior will never appear in Nifty and vice versa. Together these 100 stocks in Nifty and Junior Nifty indices are said to be the most liquid stocks in India. Of course, NSE constantly changes the composition removing inactive stocks while including actively traded stocks in the index. And there are fair chances that Nifty Junior stocks move up the chain and get included in the main Nifty index. The traded value for the last six months of all Junior Nifty stocks is approximately 16% of the traded value of all stocks on the NSE. Impact cost for CNX Nifty Junior for a portfolio size of Rs.50 lakhs is 0.26 per cent.
Salient Features of Junior Nifty BeES One unit of Junior NIFTY BeES is equal to one-hundredth of the value of CNX Nifty Junior Index. On 5.11.09, Junior Nifty index had closed at 9,391; whereas, Junior NIFTY BeES was quoting at Rs 94.53 on day’s closing on NSE. The small difference (technically called tracking error) between the underlying Nifty Junior index and Junior NIFTY BeES is due to the supply and demand factors of Junior NIFTY BeES on NSE. On 5.11.09, its day’s high was Rs 94.60 and day’s low was Rs 92.05. During the trading hours, the price of Junior NIFTY BeES will fluctuate in tune with the movement of Nifty Junior index. If the NIFTY Junior Index goes up to 13,000 in the next six months, the value of one unit of NIFTY BeES will go up to Rs 13 or if the Junior Nifty Index retraces to 8,000, then the value of one unit of Junior NIFTY BeES will be realigned to Rs 80 in tune with the movement of the market The structure of Junior 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.
Rama Krishna Vadlamudi, MUMBAI. www.pdfcoke.com/vrk100 Please read author’s disclaimer at the end.
Nov. 6, 2009
Page 3 of 9
It is traded only on the NSE (face value Rs 1.25) & India’s first ETF based on a mid-cap index (Nifty Junior index consists of mid-cap stocks) It is managed by the AMC of Benchmark Mutual Fund, which is sponsored by one Niche Financial Services Pvt. Ltd. The fund manager is Payal Kaipunjal. This Mutual Fund maintains other ETFs also – like, Nifty BeES, Liquid, Gold, Bank, Derivatives and others. The total average assets under management by the Benchmark MF are Rs 1,470 crore as on 31st of October, 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. Longterm capital gains tax (for holdings of more than one year) is NIL. (This may change if the Direct Taxes Code is implemented after 1.4.2009) Short-term capital gains tax (for holdings of less than one year) is 15 per cent, plus surcharge (if any) and 3% education cess (This too may change if the Direct Taxes Code is implemented after 1.4.2009) STT is applicable for buying/selling of units of Junior NIFTY BeES on NSE As Junior 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 Junior 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 Junior NIFTY BeES, now and then. The latest dividend was Rs 1.25 per unit paid in July 2009. NSE symbol: JUNIORBEES JUNIOR NIFTY INDEX is calculated using the Free Float methodology with effect from May 4, 2009 Assets under management as on 6.11.2009 for Junior NIFTY BeES: Rs 44.31 crore with a total of 47.37 lakh units of Junior NIFTY BeES being issued to investors
Rama Krishna Vadlamudi, MUMBAI. www.pdfcoke.com/vrk100 Please read author’s disclaimer at the end.
Nov. 6, 2009
Page 4 of 9
It is highly liquid from an individual investor’s point of view It is a passively managed fund. Its underlying will be in proportion to the weight of the constituents of Junior Nifty 50 index. Total expense ratio of the fund is 1.00% and is reasonable Tracking error of Junior NIFTY BeES is 0.68% annualized. Tracking error is the difference between Junior NIFTY BeES and its benchmark index, that is, CNX Nifty Junior Index. 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 0.68% is negligible from individual investor’s point of view. Trading of JUNIOR NIFTY BeES has been going on since its inception on NSE on March 6, 2003 All types of investors – whether retail or institutional – can invest
Junior Nifty BeES’ performance as on Nov. 5th, 2009
%
%
%
%
%
2009 (till Nov 5, 09) %
Junior Nifty Bees
27.29
25.22
28.63
75.12
-63.26
101.73
Benchmark*
30.76
24.43
27.31
77.01
-63.52
106.13
Sensex
13.08
42.33
46.70
47.15
-52.45
66.51
Fund/Index
2004
2005
2006
2007
2008
Source: ValueResearch * Benchmark is NIFTY Junior INDEX Returns are absolute
As can be seen from above, Junior Nifty BeES has given better returns compared to Sensex in the years, 2004, 2007 and 2009; whereas, Sensex had given superior returns in 2005 and 2006. In the year 2008, Sensex had fallen by 52.45 per cent while Junior Nifty BeES had fallen more by 63.26 per cent. This indicates that the volatility in the Junior Nifty BeES is much higher compared to Sensex which consists of blue-chip frontline stocks. Investors need to be aware of this volatility aspect before making any investments.
Rama Krishna Vadlamudi, MUMBAI. www.pdfcoke.com/vrk100 Please read author’s disclaimer at the end.
Nov. 6, 2009
Page 5 of 9
What are the components of Junior Nifty BeES?
Nifty BeES – Top 10 Holdings
Investment worth Rs 2 lakh in Junior NIFTY BeES will be represented by the following stocks (Top ten stocks)
Company weight %
Market Value (Rs lakh_ of the stock
1
Jaiprakash Industries
6.89
1
Jaiprakash Industries
0.14
2 3
IDFC Ltd Kotak Mahindra Bank
5.61 5.18
2 3
IDFC Ltd Kotak Mahindra Bank
0.11 0.10
5.15 4.24 3.55 3.36 3.21 2.80 2.76 42.75
4 5 6 7 8 9 10
Dr Reddy’s Labs Sesa God JSW Steel Bank of Baroda Bank of India Asian Paints HPCL Total top 10 holdings
0.10 0.08 0.07 0.07 0.06 0.06 0.05 0.85
4 5 6 7 8 9 10
Dr Reddy’s Labs Sesa God JSW Steel Bank of Baroda Bank of India Asian Paints HPCL Total top 10 holdings Data is as on Sep 30, 2009
Source: Benchmark AMC
The data on the right side of the above table gives an idea about the top holdings of an investor who is holding NIFTY th BeES units worth Rs 2 lakhs on a given day, that is, Sep. 30 , 2009. By buying units worth Rs 2 lakh, you’re indirectly holding Rs 0.14 lakh of JP Associates, Rs 0.11 lakh of IDFC, Rs 0.10 lakh of Kotak Mahindra Bank and so on.
What are the Tope five Sector Holdings? Top five sectors 80
67.86
70
%
60 50 40
30.36
30 20 10
12.18
9.08
8.45
7.79
Healthcare
Diversified
Services
Metals
0 Financials
Data Source: ValueResearch
Top 5 Sectors
Data as on Aug. 31, 2009
Note: Financials-IDFC, Kotak Mahindra Bk, etc; Healthcare-Dr Reddy’s Labs, GSK Pharma, etc; Diversified-JP Associates, etc; Services-Concor, Indian Hotels, etc; and Metals-Sesa Goa, JSW Steel, etc Rama Krishna Vadlamudi, MUMBAI. www.pdfcoke.com/vrk100 Please read author’s disclaimer at the end.
Nov. 6, 2009
Page 6 of 9
As revealed in the above graph, thirty per cent of the index consists of financials, like bank stocks and financial institutions, making it highly vulnerable to the price movements of banking/FI stocks. While in a traditional diversified equity mutual fund product, the individual fund manager has got the mandate to maintain a balanced allocation to different sectors; here in Junior Nifty BeES, the fund manager has to necessarily keep the money as per the allocation in Nifty Junior Index which moves dynamically. Even diversified equity mutual funds traditionally have exposure to the financial sector ranging from anywhere between 10 to 20 per cent due to the dominance of financial stocks in India.
Can we Buy or Sell units directly from the AMC? An investor can buy or sell minimum 16,000 units of Junior 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 exchangetrade product. It is very convenient for corporates also. Minimum Lot Size
: 16,000 units
Price
: In exchange for a basket of Junior 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: http://www.benchmarkfunds.com/creationUnit.pl?product=jb
What are the risks involved in owning the units? It’s a high risk fund and the return also can be higher or lower depending on the movement of the underlying index. Junior Nifty BeES is based on Nifty Junior Index with mid-cap stock exposure. The experience in Indian markets suggests that mid-cap stocks are highly prone to high volatility as compared to the benchmark indices, Sensex & Nifty. Investors are to be aware of other risks, like: 1) MARKET RISK: The returns of this fund are linked to the movement of stock markets in India in general. If the overall market turns adverse, then the fund will give negative returns to investors.
Rama Krishna Vadlamudi, MUMBAI. www.pdfcoke.com/vrk100 Please read author’s disclaimer at the end.
Nov. 6, 2009
Page 7 of 9
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 and Summary Junior NIFTY BeES is a high-risk financial product (high-risk compared to bluechip/frontline stocks or leading indices, Sensex or Nifty). It provides higher returns with ‘high’ risk. It is a very simple and easy to understand product. As the risk is high, returns from Junior NIFTY BeES can be higher or lower unlike bluechip stocks which give reasonable returns while protecting the downside. 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 Junior BeES represents the country’s top fifty mid-cap companies on NSE through the Junior Nifty index, it would be very easy and convenient for individual investors to buy the stock market 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 Junior 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. Junior NIFTY BeES is a very convenient financial product compared 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. The situation may change when SEBI introduces a new trading platform for MF trading irrespective of fund houses) Rama Krishna Vadlamudi, MUMBAI. www.pdfcoke.com/vrk100 Please read author’s disclaimer at the end.
Nov. 6, 2009
Page 8 of 9
WHY IS MARKET TIMING RISKY? One of the risks of market timing is being out of the market when it has a big upward move. Consider the period from May 26, 1970, to April 29, 1994. Suppose out market-timer was in cash instead of for only the best five days in the market out of that 14-year period of 3,500 trading days. He might have doubled his money (before taxes) in that 14-year period. But, had he remained invested though out this period ignoring the wild movements in stock indices, his buy-and-hold strategy would have tripled his money. Now, do you agree why market timing is a risky strategy? -- From Peter L. Bernstein’s “Against The Gods: The Remarkable Story of Risk: PS: It’s really a remarkable book for people with a mathematical and statistical mind
Another ETF that is traded on NSE is NIFTY BeES, which is a low-risk product. To know more about the author’s article dated Sep. 30th, 2009; just click:
http://www.pdfcoke.com/full/20422760?access_key=key-3ngaf0kjt35a9njgca2
OR http://groups.google.co.in/group/random-thoughts-on-investments/files?hl=en&&sort=date
Reference: 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 Junior BeES. AUTHOR’s DISCLAIMER: This should not be construed as a recommendation by me. The author holds Junior Nifty BeES units in small quantity and as such it’s safe to assume that the author has a vested interest in the its price and general market going up. The views of the author are personal. Mutual Fund performance is subject to market risk and as such investors should do their own due diligence. Readers or investors must consult their certified financial advisor before taking any decision on their equity investments and the investment should be in line with their risk profile & risk appetite and their general market perception. Any equity investment should be within their overall ASSET ALLOCATION, which is extremely vital.
Rama Krishna Vadlamudi, MUMBAI. www.pdfcoke.com/vrk100 Please read author’s disclaimer at the end.
Nov. 6, 2009
Page 9 of 9
November 6th, 2009
Junior Nifty Bees one-year return 120
Rs
100 80 60 40
Source: NSE. Data as on November 5, 2009.
11/5/2009
10/5/2009
9/5/2009
8/5/2009
7/5/2009
6/5/2009
5/5/2009
4/5/2009
3/5/2009
2/5/2009
1/5/2009
12/5/2008
11/5/2008
20 0
In just 11 months, it jumped by 120%! It’s unbelievable, true.
THE BEST OF MY STUFF ON
Reads
http://www.pdfcoke.com/vrk100
1. Income Tax Slabs 2009-10 for Salaried Class
2 027
2. Direct Taxes Code Bill 2009
964
3. Public Provident Fund PPF ac-Little Known Facts
921
5. Good and Services Tax-GST-an introduction
656
4. Interest Rate Futures-NSE launches IRFs
644
6. Nifty Bees-Exchange Traded Fund
553
TOTAL READS CROSSED 12,500! Rama Krishna Vadlamudi, MUMBAI. www.pdfcoke.com/vrk100 Please read author’s disclaimer at the end.
Nov. 6, 2009
Page 1 of 9
NIFTY JUNIOR BeES (Nifty Junior Benchmark Exchange Traded Scheme) is a mutual fund product, but it is traded on NSE throughout the trading day like any company’s share. It is an open-ended mutual fund scheme. Like a share, one can buy/sell units of NIFTY JUNIOR BeES on NSE (National Stock Exchange) throughout the trading hours. JUNIOR NIFTY BeES is traded in demat form only. One can buy JUNIOR NIFTY BeES from NSE through one’s broker and the units will be credited to one’s demat account on T+2 basis. If one desires, one can sell the units again through NSE anytime during the trading hours. Junior Nifty Bees Daily Volumes 800.00 700.00
Rs lakhs
600.00 500.00 400.00 300.00 200.00
11/5/2009
10/5/2009
9/5/2009
8/5/2009
7/5/2009
6/5/2009
5/5/2009
4/5/2009
3/5/2009
2/5/2009
1/5/2009
12/5/2008
0.00
11/5/2008
100.00
Source: NSE. Data as on November 5, 2009. One-year volume chart.
What is an Exchange-Traded Fund? Before we plunge right into Junior Nifty Bees, let us examine a little about ETFs
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
Rama Krishna Vadlamudi, MUMBAI. www.pdfcoke.com/vrk100 Please read author’s disclaimer at the end.
Nov. 6, 2009
Page 2 of 9
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
What are the Components of CNX Junior Nifty? Junior Nifty BeES ETF is based on CNX Nifty Junior Index of the NSE. There are 50 stocks in it. It can be said that they are the most liquid stocks after those 50 stocks that are part of the benchmark S&P CXN Nifty of the NSE, Mumbai, India. NSE selects these fifty stocks in CNX Nifty Junior based on market capitalization, volumes and liquidity. The stocks that appear in Nifty Junior will never appear in Nifty and vice versa. Together these 100 stocks in Nifty and Junior Nifty indices are said to be the most liquid stocks in India. Of course, NSE constantly changes the composition removing inactive stocks while including actively traded stocks in the index. And there are fair chances that Nifty Junior stocks move up the chain and get included in the main Nifty index. The traded value for the last six months of all Junior Nifty stocks is approximately 16% of the traded value of all stocks on the NSE. Impact cost for CNX Nifty Junior for a portfolio size of Rs.50 lakhs is 0.26 per cent.
Salient Features of Junior Nifty BeES One unit of Junior NIFTY BeES is equal to one-hundredth of the value of CNX Nifty Junior Index. On 5.11.09, Junior Nifty index had closed at 9,391; whereas, Junior NIFTY BeES was quoting at Rs 94.53 on day’s closing on NSE. The small difference (technically called tracking error) between the underlying Nifty Junior index and Junior NIFTY BeES is due to the supply and demand factors of Junior NIFTY BeES on NSE. On 5.11.09, its day’s high was Rs 94.60 and day’s low was Rs 92.05. During the trading hours, the price of Junior NIFTY BeES will fluctuate in tune with the movement of Nifty Junior index. If the NIFTY Junior Index goes up to 13,000 in the next six months, the value of one unit of NIFTY BeES will go up to Rs 13 or if the Junior Nifty Index retraces to 8,000, then the value of one unit of Junior NIFTY BeES will be realigned to Rs 80 in tune with the movement of the market The structure of Junior 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.
Rama Krishna Vadlamudi, MUMBAI. www.pdfcoke.com/vrk100 Please read author’s disclaimer at the end.
Nov. 6, 2009
Page 3 of 9
It is traded only on the NSE (face value Rs 1.25) & India’s first ETF based on a mid-cap index (Nifty Junior index consists of mid-cap stocks) It is managed by the AMC of Benchmark Mutual Fund, which is sponsored by one Niche Financial Services Pvt. Ltd. The fund manager is Payal Kaipunjal. This Mutual Fund maintains other ETFs also – like, Nifty BeES, Liquid, Gold, Bank, Derivatives and others. The total average assets under management by the Benchmark MF are Rs 1,470 crore as on 31st of October, 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. Longterm capital gains tax (for holdings of more than one year) is NIL. (This may change if the Direct Taxes Code is implemented after 1.4.2009) Short-term capital gains tax (for holdings of less than one year) is 15 per cent, plus surcharge (if any) and 3% education cess (This too may change if the Direct Taxes Code is implemented after 1.4.2009) STT is applicable for buying/selling of units of Junior NIFTY BeES on NSE As Junior 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 Junior 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 Junior NIFTY BeES, now and then. The latest dividend was Rs 1.25 per unit paid in July 2009. NSE symbol: JUNIORBEES JUNIOR NIFTY INDEX is calculated using the Free Float methodology with effect from May 4, 2009 Assets under management as on 6.11.2009 for Junior NIFTY BeES: Rs 44.31 crore with a total of 47.37 lakh units of Junior NIFTY BeES being issued to investors
Rama Krishna Vadlamudi, MUMBAI. www.pdfcoke.com/vrk100 Please read author’s disclaimer at the end.
Nov. 6, 2009
Page 4 of 9
It is highly liquid from an individual investor’s point of view It is a passively managed fund. Its underlying will be in proportion to the weight of the constituents of Junior Nifty 50 index. Total expense ratio of the fund is 1.00% and is reasonable Tracking error of Junior NIFTY BeES is 0.68% annualized. Tracking error is the difference between Junior NIFTY BeES and its benchmark index, that is, CNX Nifty Junior Index. 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 0.68% is negligible from individual investor’s point of view. Trading of JUNIOR NIFTY BeES has been going on since its inception on NSE on March 6, 2003 All types of investors – whether retail or institutional – can invest
Junior Nifty BeES’ performance as on Nov. 5th, 2009
%
%
%
%
%
2009 (till Nov 5, 09) %
Junior Nifty Bees
27.29
25.22
28.63
75.12
-63.26
101.73
Benchmark*
30.76
24.43
27.31
77.01
-63.52
106.13
Sensex
13.08
42.33
46.70
47.15
-52.45
66.51
Fund/Index
2004
2005
2006
2007
2008
Source: ValueResearch * Benchmark is NIFTY Junior INDEX Returns are absolute
As can be seen from above, Junior Nifty BeES has given better returns compared to Sensex in the years, 2004, 2007 and 2009; whereas, Sensex had given superior returns in 2005 and 2006. In the year 2008, Sensex had fallen by 52.45 per cent while Junior Nifty BeES had fallen more by 63.26 per cent. This indicates that the volatility in the Junior Nifty BeES is much higher compared to Sensex which consists of blue-chip frontline stocks. Investors need to be aware of this volatility aspect before making any investments.
Rama Krishna Vadlamudi, MUMBAI. www.pdfcoke.com/vrk100 Please read author’s disclaimer at the end.
Nov. 6, 2009
Page 5 of 9
What are the components of Junior Nifty BeES?
Nifty BeES – Top 10 Holdings
Investment worth Rs 2 lakh in Junior NIFTY BeES will be represented by the following stocks (Top ten stocks)
Company weight %
Market Value (Rs lakh_ of the stock
1
Jaiprakash Industries
6.89
1
Jaiprakash Industries
0.14
2 3
IDFC Ltd Kotak Mahindra Bank
5.61 5.18
2 3
IDFC Ltd Kotak Mahindra Bank
0.11 0.10
5.15 4.24 3.55 3.36 3.21 2.80 2.76 42.75
4 5 6 7 8 9 10
Dr Reddy’s Labs Sesa God JSW Steel Bank of Baroda Bank of India Asian Paints HPCL Total top 10 holdings
0.10 0.08 0.07 0.07 0.06 0.06 0.05 0.85
4 5 6 7 8 9 10
Dr Reddy’s Labs Sesa God JSW Steel Bank of Baroda Bank of India Asian Paints HPCL Total top 10 holdings Data is as on Sep 30, 2009
Source: Benchmark AMC
The data on the right side of the above table gives an idea about the top holdings of an investor who is holding NIFTY th BeES units worth Rs 2 lakhs on a given day, that is, Sep. 30 , 2009. By buying units worth Rs 2 lakh, you’re indirectly holding Rs 0.14 lakh of JP Associates, Rs 0.11 lakh of IDFC, Rs 0.10 lakh of Kotak Mahindra Bank and so on.
What are the Tope five Sector Holdings? Top five sectors 80
67.86
70
%
60 50 40
30.36
30 20 10
12.18
9.08
8.45
7.79
Healthcare
Diversified
Services
Metals
0 Financials
Data Source: ValueResearch
Top 5 Sectors
Data as on Aug. 31, 2009
Note: Financials-IDFC, Kotak Mahindra Bk, etc; Healthcare-Dr Reddy’s Labs, GSK Pharma, etc; Diversified-JP Associates, etc; Services-Concor, Indian Hotels, etc; and Metals-Sesa Goa, JSW Steel, etc Rama Krishna Vadlamudi, MUMBAI. www.pdfcoke.com/vrk100 Please read author’s disclaimer at the end.
Nov. 6, 2009
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As revealed in the above graph, thirty per cent of the index consists of financials, like bank stocks and financial institutions, making it highly vulnerable to the price movements of banking/FI stocks. While in a traditional diversified equity mutual fund product, the individual fund manager has got the mandate to maintain a balanced allocation to different sectors; here in Junior Nifty BeES, the fund manager has to necessarily keep the money as per the allocation in Nifty Junior Index which moves dynamically. Even diversified equity mutual funds traditionally have exposure to the financial sector ranging from anywhere between 10 to 20 per cent due to the dominance of financial stocks in India.
Can we Buy or Sell units directly from the AMC? An investor can buy or sell minimum 16,000 units of Junior 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 exchangetrade product. It is very convenient for corporates also. Minimum Lot Size
: 16,000 units
Price
: In exchange for a basket of Junior 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: http://www.benchmarkfunds.com/creationUnit.pl?product=jb
What are the risks involved in owning the units? It’s a high risk fund and the return also can be higher or lower depending on the movement of the underlying index. Junior Nifty BeES is based on Nifty Junior Index with mid-cap stock exposure. The experience in Indian markets suggests that mid-cap stocks are highly prone to high volatility as compared to the benchmark indices, Sensex & Nifty. Investors are to be aware of other risks, like: 1) MARKET RISK: The returns of this fund are linked to the movement of stock markets in India in general. If the overall market turns adverse, then the fund will give negative returns to investors.
Rama Krishna Vadlamudi, MUMBAI. www.pdfcoke.com/vrk100 Please read author’s disclaimer at the end.
Nov. 6, 2009
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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 and Summary Junior NIFTY BeES is a high-risk financial product (high-risk compared to bluechip/frontline stocks or leading indices, Sensex or Nifty). It provides higher returns with ‘high’ risk. It is a very simple and easy to understand product. As the risk is high, returns from Junior NIFTY BeES can be higher or lower unlike bluechip stocks which give reasonable returns while protecting the downside. 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 Junior BeES represents the country’s top fifty mid-cap companies on NSE through the Junior Nifty index, it would be very easy and convenient for individual investors to buy the stock market 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 Junior 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. Junior NIFTY BeES is a very convenient financial product compared 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. The situation may change when SEBI introduces a new trading platform for MF trading irrespective of fund houses) Rama Krishna Vadlamudi, MUMBAI. www.pdfcoke.com/vrk100 Please read author’s disclaimer at the end.
Nov. 6, 2009
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WHY IS MARKET TIMING RISKY? One of the risks of market timing is being out of the market when it has a big upward move. Consider the period from May 26, 1970, to April 29, 1994. Suppose out market-timer was in cash instead of for only the best five days in the market out of that 14-year period of 3,500 trading days. He might have doubled his money (before taxes) in that 14-year period. But, had he remained invested though out this period ignoring the wild movements in stock indices, his buy-and-hold strategy would have tripled his money. Now, do you agree why market timing is a risky strategy? -- From Peter L. Bernstein’s “Against The Gods: The Remarkable Story of Risk: PS: It’s really a remarkable book for people with a mathematical and statistical mind
Another ETF that is traded on NSE is NIFTY BeES, which is a low-risk product. To know more about the author’s article dated Sep. 30th, 2009; just click:
http://www.pdfcoke.com/full/20422760?access_key=key-3ngaf0kjt35a9njgca2
OR http://groups.google.co.in/group/random-thoughts-on-investments/files?hl=en&&sort=date
Reference: 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 Junior BeES. AUTHOR’s DISCLAIMER: This should not be construed as a recommendation by me. The author holds Junior Nifty BeES units in small quantity and as such it’s safe to assume that the author has a vested interest in the its price and general market going up. The views of the author are personal. Mutual Fund performance is subject to market risk and as such investors should do their own due diligence. Readers or investors must consult their certified financial advisor before taking any decision on their equity investments and the investment should be in line with their risk profile & risk appetite and their general market perception. Any equity investment should be within their overall ASSET ALLOCATION, which is extremely vital.
Rama Krishna Vadlamudi, MUMBAI. www.pdfcoke.com/vrk100 Please read author’s disclaimer at the end.
Nov. 6, 2009
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