Exchange Trade Funds, also known by their abbreviation ETFs, are becoming more and more popular among investors with each passing day. Basically, an ETF aims to invest in the basket of securities that duplicates the composition of a market index. This can include any like SENSEX, Nifty, Nifty 100, BSE 100, etc. These funds do not aim to beat the market returns, rather their objective is to track and deliver market returns by keeping a track of the benchmark’s index performance as closely as they possibly can. Another great advantage of an ETF is its low cost.
How to select the correct ETF?
There are basically three parameters that need to be kept in mind when investing in an ETF.
- Total expense ratio: The lower the ratio, the higher the return for the asset will be.
- Tracking error: A tracking error is a deviation that occurs between the index return and the ETF return. This is an important parameter since an investor is basically investing in the index.
- Liquidity: Unlike Mutual Funds, ETFs are bought and sold in the market stock exchange. This makes this parameter really important.
The Nippon India ETF Nifty BeES
The Nippon India ETF Nifty BeES ranks really well on all the above parameters, which makes it one of the best Nifty ETFs. This was launched in December 2001 and has INR 2850 crores worth AUM as of now. Its expense ratio stands at just 0.05% as of 31 March 2020. Just like the name suggests, the benchmark index for this fund is the Nifty 50 TRI. The fund manager for the same is Vishal Jain, and the fund manager aims at not beat Nifty, but rather tracking its performance.
Why should one invest in Nifty ETFs?
The two most popular stock indices in the country are Sensex and Nifty. Respectively, they represent the largest 30 and 50 stocks by market capitalization. They are also able to represent the market sentiments more accurately than any of their counterparts. The Nifty 50 also accounts for around 67% of the total free float of the stocks that are traded in NSE.
Sensex, however, is the older one, which is largely why it is more popular among the general public. Nifty, on the other hand, is more popular among professional traders, financial advisors, fund managers, and institutional investors. This is mostly for two reasons. Nifty has a larger derivate market when compared to the Sensex. Therefore, Nifty ETFs are much more liquid than Sensex ETFs, since these can be used by traders, investors, and fund managers for hedging and arbitrage. Secondly, Nifty, with its 50 stocks, is much more diverse as compared to Sensex, which has just 30 stocks.
The Nippon India ETF Nifty BeES versus the Nifty 50 TRI
When the trailing returns of Nippon India ETF Nifty BeES are compared with its benchmark index, the difference between the two is only 10 to 20 bps. Thus, the tracking error is quite small.
The Nippon India ETF Nifty BeES has also managed to outperform almost all other over most periods. The recent relative underperformance of the fund can be attributed to the outperformance of Gold ETFs over the previous year. However, this short term underperformance of Nifty in comparison to Gold is temporary, since Nifty has always managed to outperform Gold in the long term as per historical data.
Also, Nippon India ETF Nifty BeES has an expense ratio of just 0.05%. The average expense ratio of Nifty 50 ETFs is around 0.16%. And because all these ETFs aim to track the Nifty 50 TRI, which is essentially the same performance, a lower expense ratio directly translates to a higher return.
Nippon India ETF Nifty BeES liquidity
A lot of investors tend to ignore this aspect when they invest in a mutual fund. However, liquidity is really important when it comes to an ETF. This is because unlike a mutual fund, ETFs cannot be redeemed by sending a request to AMCs, unless you happen to be redeeming large volumes ( which most retail investors will not be able to do).
Therefore, most retail investors need to get liquidity for ETFs in the stock exchange. If you cannot fund enough buyers in the stock exchange, you might not be able to sell your ETF units. Thus, in order to get some sense of liquidity, you need to be looking at traded volumes of shares and units in the exchange.
As per data, over the last 10 days, 3.8 million units of Nippon India ETF Nifty BeES were traded every day in the NSE, which makes it one of the most liquid of all Nifty ETFs.
The above blog post discussed in detail the Nippon India ETF Nifty BeES, including its performance and other features. Nifty ETFs are one of the best long term investments that one can make in the current market conditions. Also, Nifty companies are the least likely to be affected by the economic slowdown which is caused by the lockdown, as compared to other smaller companies. So if you find this ETF to be suited for your investment needs, you should consult your financial advisors.