Junior Nifty BeES Exchange Traded Fund
How to Make Higher Profits?
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.
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What is an
Exchange-Traded Fund?
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Before we plunge right into Junior Nifty
Bees, let us examine a little about ETFs-
1) An
ETF is basically an index mutual fund scheme with a little difference
2) 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
3) An
ETF is linked to a benchmark index like any index fund
4) An
ETF can be bought and sold through an exchange like any share
5) 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
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What are the
Components of CNX Junior Nifty?
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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.
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Salient Features of
Junior Nifty BeES
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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.
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. Long-term
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
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
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Junior Nifty BeES’
performance as on Nov. 5th, 2009
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Fund/Index
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2004
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2005
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2006
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2007
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2008
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2009 (till Nov 5, 09)
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%
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%
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%
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Junior Nifty Bees
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27.29
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25.22
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28.63
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75.12
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-63.26
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101.73
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Benchmark*
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30.76
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24.43
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27.31
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77.01
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-63.52
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106.13
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Sensex
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13.08
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42.33
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46.70
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47.15
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-52.45
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66.51
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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.
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What are the
components of Junior Nifty BeES?
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(click on the image for a better view)
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What are the Tope five
Sector Holdings?
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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.
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Can we Buy or Sell
units directly from the AMC?
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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 exchange-trade 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:
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What are the risks
involved in owning the units?
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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.
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.
Junior NIFTY BeES is a high-risk financial product (high-risk compared
to blue-chip/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 blue-chip 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)
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Abbreviations used:
NSE - National Stock Exchange of India Limited
ETF - exchange-traded fund
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:
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.
Disclosure: I've vested interested
in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if
any.
Disclaimer: The analysis and
opinion provided here are only for information purposes and should not be construed
as investment advice. Investors should consult their own financial advisers
before making any investments. The author is a CFA Charterholder with a vested
interest in financial markets.
Goldman Sachs took over Benchmark Mutual Fund and it's now called Goldman Sachs Mutual Fund. Consequently,Junior Nifty BeES is now official known as Goldman Sachs Nifty Junior Exchange Traded Scheme.
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