1Mutual Fund Scheme Analysis                                                            October 09, 2012GS Nifty BeES – a ...
2Mutual Fund Scheme Analysis                                                                            contd…  Passively ...
3Mutual Fund Scheme Analysis                                                                               contd….Advantag...
4Mutual Fund Scheme Analysis                                                                                      contd….D...
5Mutual Fund Scheme Analysis                          contd….GS Nifty BeES vs. Nifty Futures:ETFs vs. Index funds:GS Nifty...
6Mutual Fund Scheme Analysis                                                                          contd….             ...
7Mutual Fund Scheme Analysis                                                                                 contd….GS Nif...
8Mutual Fund Scheme Analysis                                                                                              ...
9Mutual Fund Scheme Analysis                                                                                              ...
10Mutual Fund Scheme Analysis                                                                              contd….How do E...
11Mutual Fund Scheme Analysis                                                      contd….    How ETFs work?        Primar...
12Mutual Fund Scheme Analysis                                                                                             ...
13Mutual Fund Scheme AnalysisNo     Analyst: Dhuraivel Gunasekaran.                                                       ...
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GS Nifty beES - review as on oct 09, 2012

  1. 1. 1Mutual Fund Scheme Analysis October 09, 2012GS Nifty BeES – a review:Rationale behind investing in an Index: Investing in an index is considered as efficient investment option as the index includes large actively traded stocks from diversified and performing industries. Indices are revamped periodically representing the changes in the importance of sectors and growth cycle of stocks. The world changes, so the index should change. Investors benefit out of these changes as they need not take a call on entering or exiting a particular sector or stock.Rationale behind investing in GS Nifty BeES: GS Nifty Bees gives a chance to Participate in the most happening large cap stocks that will ride on growth in Indian economy, Incur low cost in terms of expenses of scheme (compared to a diversified fund) or lower transaction costs (in the case of direct equity requiring frequent reshuffling), Go in for SIP and take advantage of volatility in the markets to arrive at a lower entry level, Avoid possibility of underperforming the benchmark, Avoid the need of constantly monitoring and reviewing portfolio. Prologue - ETFs: Exchange-Traded Funds (ETFs) are preferred investment products by investors for their uniqueness of getting access to broader market indices, diversified investment approach, low cost structure and transparency. They are passively managed funds investing in the securities comprising an index in a proportion which the securities are present in that index. They are listed and traded on stock exchanges so that they can be bought and sold on the real time basis like equity shares.GS Nifty BeES Retail Research
  2. 2. 2Mutual Fund Scheme Analysis contd… Passively managed Mutual Funds: Passively managed funds are mutual fund schemes that are designed to match the returns on a particular stock market index. They do simply follow the index, construct the portfolio in proportion to the index constituents and generate the return in line with the index. The other type of mutual funds are called as actively managed mutual funds which are managed actively by the fund managers. Unlike passively managed funds, actively managed funds are mandated to outperform the respective benchmarks by using the skills set of the fund managers. Index Funds and ETFs: There are two types of passively managed funds available in the mutual fund spectrum, called as Index funds and ETFs. Index funds and ETFs vary each other mainly in terms of tradability on the exchanges. ETFs are listed on the stock exchanges and traded in the real time basis like equity shares while the Index funds are not listed on any exchanges whose NAVs are calculated and declared once in a day like other normal mutual funds. In this note, we cover the features of ETFs and review the performance of GS Nifty BeES which is the index ETF with the largest corpus and the most liquid index ETF. Suitability: ETFs are suited for conservative investors who want to follow and are willing to get returns in line with index returns. First time investors who wish to enter into equity market, can consider opting the index ETF route. Investing through staggered investment mode like DIY SIP will further help them to accumulate cost averaging units over periods. However, Investors have to own a demat account and a broker’s account to participate in the investment process of ETF transaction. Best investment option to achieve long term goals: ETFs are considered as one of the investment options to grow the wealth over long run. It is noteworthy to say that most of the ULIPs and New Pension Funds prefer to include ETFs in their portfolio to achieve their long term objectives. The Finance Minister has approved to bring broader indices ETFs under Rajiv Gandhi Equity Saving Scheme as eligible securities.GS Nifty BeES Retail Research
  3. 3. 3Mutual Fund Scheme Analysis contd….Advantages of ETFs: Lower expense ratio: ETFs are less expensive in comparison to actively and other passively managed schemes. The expense ratio of ETFs is the lowest among mutual fund schemes which ranging from 0.25% to 1%. Index Funds charge between 0.75% to 1.5% while actively managed funds charge up to 2.5% of the net assets. The low expense ratio of ETFs is mainly attributable to passive investment nature hence there is no need of requiring the service of fund managers and analysts. Moreover, there is less marketing cost and commissions. The average expense ratios for ETF category as on Sep 2012 was at 0.87% (including gold ETFs). Diversification: The investment through ETFs are widely diversified as indices are constructed to represent performance of the stock market as a whole. It reduces the overall risk of one’s portfolio. Apart from major indices such as Sensex and Nifty, fund houses have bestowed investors an opportunity to diversify their portfolios through market capitalization (ICICI Nifty Junior, IDBI Nifty Junior and Junior BeES providing investment opportunities in mid cap space), focusing on industry (Bank BeES & Infra BeES), asset class (liquid and Gold) and explore in global arena (Hang Seng BeES). Transparency: Investors can access the portfolio composition of index any day at any point of time. On the other hand, portfolios of other mutual funds schemes are declared by AMCs once in a month. No fund manager Risk: As the objective of such schemes is to mimic the performance of index which they track, they construct the portfolios same as the tracking indexes. So these funds stay away from the risk of subjective performances and biases of fund managers. Liquidity: ETFs are listed and traded on stock exchanges like equity shares. They can be bought and sold on real time basis at currently available prices at any time during trading hours. However, AMCs arrange to absorb any excess supply of units that an investor would like to sell or create fresh units when the demand for units is large enough. On the other hand, other funds including index funds that are available only at day-end NAV. Simplicity: There is no separate form filling and can be traded by just a phone call. Investors have the ability to put limit orders. Others: There is an arbitrage opportunity available between Futures and Cash Market. Above all, passive funds provide better downside protection than actively managed schemes during downturns.GS Nifty BeES Retail Research
  4. 4. 4Mutual Fund Scheme Analysis contd….Disadvantages of ETFs: On the downside, there are some drawbacks associated with ETFs. Demat account: Demat account and broker’s accounts are mandatory for an investor to participate in the ETF trading as they are traded in stock exchanges. No demat and broker accounts are necessary in case of index and other mutual funds transactions. Brokerage Charges: Brokerage and other transaction charges need to be paid when trading in ETFs. It can be minimized by trading less but the very charm of ETFs is affected because it is meant for being traded more often than an index fund. Premiums and Discounts: An ETF might trade at a discount to the underlying shares. This means that although the index might be doing very well on the bourses, yet the ETF might be traded at less than the market value of the index. SIP in ETF is not convenient as you have to place a fresh order every month and also SIP may prove expensive as compared to a no-load, low-expense index funds as you have to pay brokerage every time you buy & sell. True Replication: The index and ETFs may not replicate the returns of underlying index due to management expenses, cash holding and so on which result in higher tracking error. Inbuilt Cost: Impact cost is higher than its constituents. Transaction costs like brokerage charges need to be paid anyway when trading in ETFs.Comparison of ETFs, Stocks and Mutual Funds: *= Including Index funds and non Index fundsGS Nifty BeES Retail Research
  5. 5. 5Mutual Fund Scheme Analysis contd….GS Nifty BeES vs. Nifty Futures:ETFs vs. Index funds:GS Nifty BeES Retail Research
  6. 6. 6Mutual Fund Scheme Analysis contd…. Goldman Sachs Nifty Exchange Traded Scheme (GS Nifty BeES)Features of GS Nifty BeES: First Exchange Traded Fund (ETF) in India. Combination of a share and a mutual fund unit. Real-time Trading on NSE. Real-time Indicative NAV. Available across NSE terminals. Tracks the S&P CNX Nifty Index. Priced at 1/10th of the Nifty Index. The maximum total expense ratio is 0.80% per annum. Structured as a Mutual Fund under the SEBI 1996 regulations.Advantages of GS Nifty BeES: Simple – Can be bought/ sold on NSE like a share…real-time. Economical – No load scheme. Annual expense is one of the lowest for any mutual fund scheme in India. Diversification – It’s a cost efficient way to invest in a basket of securities. Equitable Structure – Long term investors insulated from short term trading activity. Transparent – Investors have access to information on the portfolio constituents represented on a daily basis.GS Nifty BeES Retail Research
  7. 7. 7Mutual Fund Scheme Analysis contd….GS Nifty BeES – Scheme Details: NSE Symbol :NiftyBEES. BSE Code :590103. ISIN :INF732E01011. Reuters :NBES.NS. Bloomberg :NBEES.IN. Closing Price :571.40 (Rs as on Oct 08, 2012) NAV :574.82 (Rs as on Oct 08, 2012) Expense Ratio :0.50% (as on Sep ’12) Tracking Error :0.12%* Issued Cap :1,00,67,476(shares) as on 08-Oct-2012. Market Cap :575.85 (Crore) as on 08-Oct-2012. 52 week high/low price :585/462.85. Impact cost :0.10 (as on Sep ’12) Entry / Exit Load :Nil. P/E multiple of Nifty :17.64 (as on 31 Aug 2012) P/B multiple of Nifty :2.87 (as on 31 Aug 2012) Dividend yield of Nifty :1.57% (as on 31 Aug 2012)Note:•*- Tracking Error is calculated based on daily Rolling Returns for last 12 months (Source: NAVIndia).GS Nifty BeES Retail Research
  8. 8. 8Mutual Fund Scheme Analysis contd….Relative performance of GS Nifty BeES: Note: Trailing Returns up to 1 year are absolute and over 1 year are CAGR. NAV/index values are as on Oct 08, 2012. Portfolio value as on Aug 2012. TE is calculated based on daily Rolling Returns for last 12 months.Daily traded volume in GS Nifty BeES on NSE: 100 80 60 (Rs Crs) 40 20 0 J ul-09 N ov -09 J an-10 Mar-10 May -10 J ul-10 N ov -10 J an-11 Mar-11 May -11 J ul-11 N ov -11 J an-12 Mar-12 May -12 J ul-12 Sep-09 Sep-10 Sep-11GS Nifty BeES Retail Research
  9. 9. 9Mutual Fund Scheme Analysis contd….Discount (+) / Premium (-) of Spot Price to NAV over the last five months:Average of Discount (+) / Premium (-) of Spot Price to NAV over the last five months: 25% 19.1% 20% 15% 8.7% 10% 7.0% 2.2% 2.8% 3.1% 5% 0.3% 0.3% 0.3% 0.3% 0.5% 0.7% 0.7% 0.9% 1.4% 1.6% -0.2% 0.1% 0% -5% -0.4% GS PSU Bank ETS IIFL Nifty ETF MOst NASDAQ 100 ETF MOSt Midcap 100 ETF MOSt Shares M50 ETF Quantum Index ETF ICICI Spice Gs Nifty Junior ETF GS Banking ETF GS Hang Seng ETF Reliance Banking ETF GS Nifty ETF GS Infra ETF Kotak Nifty ETF Religare Nifty ETF GS Shariah ETF Kotak Sensex ETF Kotak PSU Bank Birla Sun Life Nifty ETFGS Nifty BeES Retail Research
  10. 10. 10Mutual Fund Scheme Analysis contd….How do ETFs Function? ETFs vary from normal mutual funds in terms of the functionality, the manner in which they are created, bought and sold. In normal mutual funds, investors pay cash to the fund house, which in turn buys the securities and constitutes the fund. In case of ETFs, the fund house appoints market makers in the stock market to execute all the transactions on behalf of the fund house. The market-makers, also called as arbitrageurs or Authorized Participants (APs) involve into the following four distinct transactions; 1. The Authorized Participants purchase a basket of shares, as specified by the fund house, for cash. 2. This basket of securities is then exchanged with the fund house for a set number of ETF units (creation). 3. The Authorized Participants then satisfy market demand by doing buy/sell orders (and sell/redeem these units to investors just like a distributor does). 4. The Authorized Participants are performing an arbitrage between the ETF and index to keep the market price of the ETF close to its NAV. The Authorized Participants are empowered to create or redeem ETF units. They buy the basket of securities (such as all the scrips of the market index as specified by fund house) and hand it over to the fund house, in exchange of a certain number of units (which are usually 50,000 or a multiple thereof). This process is called unit creation, whereby ETF units are “created” in exchange of a basket of securities. The Authorized Participants then break up these units and sells them separately on the stock exchange. Investors can then buy and sell these units through the stock exchange. The Authorized Participants also redeem the ETF units by delivering them to the fund house in return for the securities represented by those units. Note that the exchange of ETF shares and the securities they represent between the Authorized Participants and the fund house is an in-kind exchange—there is no exchange of cash. This also lowers taxes for the ETF sponsor, thereby lowering the fund’s fees.GS Nifty BeES Retail Research
  11. 11. 11Mutual Fund Scheme Analysis contd…. How ETFs work? Primary market Secondary market Seller Cash ETF Units Authorized Buy / sell Participants / Stock Exchange Market making / FI ArbitrageCreation Redemption Cash in-kind in-kind ETF Units Fund BuyerGS Nifty BeES Retail Research
  12. 12. 12Mutual Fund Scheme Analysis contd….Tracking Error: Investors in an ETF buy or sell a security representing shares in the underlying index fund. They do expect the price of the ETF to closely track the value of the underlying Index. They also want a sense of how closely the ETF returns correlate with those of the index. Tracking error helps out the investors to measure as to how closely the ETF tracks the underling index. Tracking error is a statistical term commonly used to describe the volatility of returns of a ETF relative to the returns of its benchmark index. It is typically expressed in terms of the standard deviation of the differences between ETF and index returns over a specific horizon. It can be interpreted as the range around the index return in which ETF returns are expected to be. For example, a tracking error of 1% implies that if the index return is 10%, the ETF return should be 9%-11% about 68% of the time. Tracking Error tells how much an ETFs returns deviate from the benchmark indexs returns over any given period of time. An ETF fund manager needs to calculate his tracking error on a daily basis especially if it is open-ended fund. Lower the tracking error, closer are the returns of the fund to that of the target Index. For investors’ point of view, the lower the tracking error, the better is the ETF.Annualized Tracking Error (TE) calculated for one year period ending: Kot ak Sensex ETF 0.03 ICICI Pru SPIcE Fund 0.06 Birla Sun Lif e Nift y ETF 0.10 Kot ak Nift y ETF 0.10 Quant um Index 0.10 IIFL Nift y ETF 0.10 GS Nif ty BeES 0.15 Religare Nif ty EETF 0.17 M OSt Shares M 50 ETF 0.39 GS Shariah BeES 0.40 M oSt M idcap 100 ETF 0.66 GS Junior BeES 0.66 GS Inf ra BeES 0.83 R* Shares Banking ETF 0.85 GS Bank BeES 0.87 Kotak PSU Bank ETF 1.42 GS PSU Bank BeES 1.42 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60GS Nifty BeES Retail Research
  13. 13. 13Mutual Fund Scheme AnalysisNo Analyst: Dhuraivel Gunasekaran. (Database sources: AMC Sites, NAVIndia & Ace MF) HDFC Securities Limited, I Think Techno Campus, Bulding –B, ”Alpha”, Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone (022) 30753400 Fax: (022) 30753435 Disclaimer: Mutual Fund investments are subject to risk. Past performance is no guarantee for future performance. This document has beenprepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be reliedupon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for non- Institutional Clients.GS Nifty BeES Retail Research