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Monday, December 8, 2008

BeES in your bonnet?

After a steep fall and a short and sharp rally, the Sensex has been moving in a sideways consolidation phase for the past few weeks. At times like this, it becomes difficult for fundamental or technical analysis to provide clear indications of what is to follow next.

Reduction in the repo and reverse repo rates have probably been 'discounted' by the market already. The overhang of tensions following the Mumbai terror attack puts a spanner in the works of any quick recovery in the economy. And consolidation phases are notorious for doing exactly the opposite of what every one expects them to do.

Small investors have four choices.

For the adventurous who rely on their stock picking skills, this may be as good a time as any to start buying into frontline stocks at beaten down prices and build a good long term portfolio.

The less adventurous can select highly rated large cap diversified equity funds with good performance records over bull and bear cycles.

For conservative investors the above two choices may still seem risky because of the possibility of further downsides. Also, when the market does turn upwards (as it eventually will), there is no guarantee that the shares or funds selected will perform well.

Risk averse investors should then limit their choices to bank fixed deposits or index funds. Fixed deposits protect capital but are not tax efficient. At current interest rate of around 10%, the post-tax return at the highest tax bracket of 33% will provide a net return of 6.7% (which is lower than the current inflation rate).

Index mutual funds allow the investor to buy into a particular index - it could be the Sensex or Nifty. The underlying assets are the 30 Sensex or 50 Nifty stocks. There is no relying on a particular fund manager's skills or whims in stock selection. The returns will be almost the same as the Sensex or Nifty performance.

A good spin on an index fund is Benchmark Mutual Fund's Nifty BeES ETF (Exchange Traded Fund). An ETF is listed on a stock exchange and can be bought and sold at any time during the trading day through a broker by paying the Security Transactions Tax (STT). So for all intents and purposes, it is treated like a share. There are no separate entry/exit loads.

But while the underlying asset of a share is a single company, Nifty BeES' underlying asset is the entire Nifty 50 stock group. Which means that by buying a unit of Nifty BeES, whose NAV is 1/10th of the current Nifty level, you are effectively buying all 50 stocks that comprise the Nifty.

Why not just buy an index mutual fund? The major advantage of an ETF like Nifty BeES is being able to buy or sell any time during the day at the prevailing rate - whereas a mutual fund can only be bought or sold at the day's closing NAV value. During volatile trading days, this can be a real advantage.

The other unseen advantage, apart from there being no entry or exit loads, is that the fees charged by the fund is much less because an expert fund manager's stock picking skills are not required. So the disposable profits are higher.

If you are a risk averse investor with some spare cash, periodic investments in Nifty BeES can provide reasonable, if not spectacular, returns over the long term.

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