Buying stocks? Take a bite of ETFs
-------------------------------------------------------------------------------- Exchange Traded Funds don the role of a good teacher for lay investors, who have appetite for the equity market. They offer the best of both worlds - benefits of mutual fund and the convenience of stocks. -------------------------------------------------------------------------------- S. Hamsini Amritha Tempted by the present "attractive" Sensex levels? Are you one of those convinced that this is a good time to enter the equity market? If yes, read on. If you are not technically qualified to understand the nuances of a company's financial statements, then the easy way to buy stocks is to invest in companies that are well-known - blue-chip companies traded on the stock exchanges for decades. There are two ways to do this. Buying large-caps Based on the value of a company's outstanding shares, companies are broadly categorised as large-, mid- and small-cap companies. Companies such as Reliance Industries, Infosys, Hindalco or, for that matter, any of the Sensex constituents (the large caps) are scrips that have withstood the test of time. Though the prices of these stocks too have been beaten down since January, the fall in mid-cap and small-cap stocks is much higher than that of the Sensex. While the latter shed 55 per cent during this period, mid-caps and small-caps registered a loss of over 60 per cent each. This is because large companies are expected to weather any economic slowdown better than their smaller peers. Even within sectors, Sensex stocks have performed better than the mid- and small-cap stocks. For example, in the IT sector (whose performance in the stock market has been wobbly since January), while Infosys lost more than 30 per cent since January, HCL Technologies and Hexaware shed about 63 per cent and 75 per cent, respectively. The same is the case with some other sectors such as power generation, telecom and capital goods. NTPC, a blue-chip scrip, lost about 32 per cent while the mid-cap Neyveli Lignite Corporation lost over 50 per cent. Such trends are visible across most sectors, making the case stronger for first-time investors to stick to large-caps. Welcome to EFT! How do you choose which Sensex stock to buy when it is a collection of India's best-known names and each looking lucrative in its own way? To step-side this problem, you'll need to buy the entire Sensex basket. But won't that require a lot of money? Confused? Welcome to ETFs, or Exchange Traded Funds! They are funds that mimic baskets of securities in an index, and are traded like individual stocks on an exchange. In India, there are now six ETF options. Table shows the popularly traded ETFs. ETF Vs MF These funds may be look-alikes of mutual funds but actually have two major differences. One, they are 'passive', unlike mutual funds, where fund managers actively choose which stocks to buy. The movement of the ETF is almost a mirror image of the respective stock market index. Two, in contrast to MFs, one buys and sells ETFs through the market and not through a fund house. This means you may buy and sell an ETF at any point during a trading session, just as you trade in shares. All you need to buy and sell these funds is a demat account. Many mutual fund houses also offer investors open-end index-based funds. But these funds may not be fully invested at all times. They do hold back some portion as cash to meet redemption. This leads to a "tracking error" error (difference between ETF returns as against that given by the index it tracks) where such funds may not completely replicate indices. The fact that Nifty BeES and S&P CNX Nifty are now trading 52 per cent below their respective January levels is a good indicator of how closely the ETFs track the indices. Just like how an investor may be confused about which stock to pick, he may be confused about which MF to invest in as well! The reason is fund houses often offer products across diverse sectors such as infrastructure, power, realty and so on. Sometimes, a particular sector may not participate in a market upswing and your money may go for an absolute toss. So, an investor is expected to apply reasonable judgement in selecting the fund(s). If that be the case, a beginner might as well put his money directly into the equity market, why MFs? ETFs offer a solution by picking the whole basket and thereby minimising the risk of wrong choice. Advantage ETF To wrap up, ETFs are a good bet for more reasons than one. Statistics show that, in the long term, equity returns have surpassed that of every other asset class. Since ETFs invest in securities that form a part of a particular index, their returns are more or less in line with index returns (though it is not expected to outperform the index, which individual stocks may). Their low-cost structure makes ETFs more economical than MFs. The Nifty BeES, for instance, has a cost structure of around 0.50 per cent, much lower than what conventional mutual funds levy (around 2.5 per cent). But the ultimate advantage is the real-time trading, which allows you to buy or sell at the exact time of your choice. ETFs don the role of a good teacher for lay investors, who have the appetite for equity market. Once you are comfortable with trading in ETFs, you are all set to make the big plunge. In short, for a rookie, ETFs offer the best of both worlds - they give benefits of mutual funds and the convinience of stocks. http://www.thehindubusinessline.com/iw/2008/12/21/stories/2008122150701400.htm Deeds, like seeds, take their own time to fructify. --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups "Kences1" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [email protected] For more options, visit this group at http://groups.google.com/group/kences1?hl=en -~----------~----~----~----~------~----~------~--~---
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