India Markets

Instant Diversification

Brandon Wendell
Instructor, CMT

Exchange Traded Funds (ETFs) have long been used in the United States as a means for investing in multiple securities without the higher fees involved with mutual funds. An ETF is a tradable security that represents ownership in a basket of shares in multiple companies. The ETF is similar to a mutual fund in that you get to invest in more than one company with a smaller capital outlay.

The problem with Indian ETF’s has been twofold.  First, there was a limited offering of different ETFs.  There are only 33 ETFs available for trading in India.  In the US there are over 500!  The most well known ETFs are the Gold BEES.  Secondly, the volume in these ETFs has been relatively low as investors and brokers were not educated in how to use them and chose mutual funds instead.

This may change with the recent entry of Goldman Sachs into the Indian markets.  Goldman, one of the largest market players in the United States, did not have any interests in ETFs.  They were primarily a large institutional trading firm.  They started their own mutual fund unit in India in 2008 but as of March 2011, they bought Benchmark Asset Management Co.  This purchase gave them ownership of the largest selection of ETFs in India.

As you can see by the picture below, the Nifty BEES ETF is weighted very similarly to the Nifty Index itself.  The performance should mirror the index without the higher costs of a mutual fund.  You can buy a share of the ETF for Rs. 608.61 and have ownership in shares in all 50 Nifty stocks.

Even the Indian government is entering the ETF market.  They have announced a bidding process for mutual fund companies to create an ETF that would allow people to invest in PSU’s.  The bids must be submitted by 24th January.

With Goldman’s involvement in the market and more educational opportunities for investors, the ETF market share should continue to grow.  This will offer a great way to diversify a portfolio with lowered costs.  Since the ETFs are traded as stocks are, they also allow trading opportunities once the volume is sufficient.  This is a market to watch in the upcoming year.

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.