India is the latest buzzword in the global financial marketplace. The perception of global investors about India is changing for the better.
India’s ability to protect itself in the recent meltdown has resulted in investors viewing India as a separate investible entity. Earlier, this market was unceremoniously clubbed with other emerging markets and merited only an occasional mention. India is now seen as a fast-growing economy with specific skills in knowledge-based sectors such as information technology, financial and healthcare.
Foreign investors heading for India
India’s financial sector is doing well. The government is giving priority to infrastructure development. There are effective regulatory mechanisms in place. All these factors make India an ideal destination for foreign investors. It is an ideal destination for investors looking for alpha returns and follows a more actively-managed investment strategy.
Domestic ETFs trade well in the US
Many new Indian exchange-traded funds (ETFs) are being launched in the US and these ETFs trade very well there. A tremendous short-term gain of 23 percent by an Indian ETF and 52.5 percent year-to-date returns generated by another India ETF has helped in generating the buzz around Indian investments.
ETFs represent a basket of stocks that reflect an index, say Nifty, S&P 500 or Nikkei.
ETF helps in diversification
An ETF is a financial instrument that is traded on the stock markets
like any other shares, unlike a mutual fund. Hence, an ETF’s price changes throughout the day, fluctuating with supply and demand. On the other hand, a mutual fund’s NAVs are calculated at the end of each trading day. ETF helps in diversification by investing in index and flexibility or liquidity like a stock in the same instrument.
The expense ratio of an ETF is less, and brokerage and commissions are chargeable like any other share. It is important to remember that while ETFs attempt to replicate the return on indices, there could be some tracking error that varies from fund to fund depending on the fund manager’s ability. It is not uncommon to see a one percent or more difference between the actual index’s year-end returns and that of an ETF.
Here, an ETF is nothing but an exchange-traded fund that is based on a basket of securities listed on various exchanges. These ETFs aim at capturing the major sectors of the economy by owning a diversified mix of major companies that represent the majority of the total market capitalisation of the economy.
India-focused ETFs can be of two types – domestic and international. International ones are those floated aboard, targeted at international
investors who want to invest in India. Such ETFs carry a higher expense ratio than most domestic funds, but it should be noted that administrative costs will typically be higher when international investments are involved due to increased exchange costs and brokerage fees for trading on an international exchange.
Domestically, India began its foray into the sphere of exchange-traded funds in December 2001. ETF like Nifty BeES, the Nifty Benchmark Exchange-traded Scheme was the first Indian ETF launched in the country. Based on the S&P CNX Nifty Index, it was launched by the Benchmark Mutual Fund. Other India ETFs include the Junior BeES, Liquid BeES and gold-based ones.
Investment strategy
Every individual investor must consider investing in ETFs for the convenience it offers. It is a simple instrument that is easy to understand and invest in. The associated costs are low, and the portfolios are flexible and tax-efficient if held for more than a year. ETFs simplify the index and sector investing in a way that is easy to understand. For example, if an investor feels that gold could appreciate in the next six months he can invest in gold ETF or if he feels that mid-cap stocks could appreciate he can invest in ETFs tracking midcap index.
Here, the advantage is that instead of investing in a few mid-cap shares and hoping those very mid-caps will appreciate in value, the investor gets the whole basket of mid-cap by investing in an ETF tracking the midcap index. The disadvantage is that if only some midcaps appreciate and some don’t the ETFs will show only a marginal increase in value.
Nevertheless, long-term investors will find that the broad-market based ETFs can find a place in their portfolios. ETFs make sense for buy-and-hold investors too. The combination of the immediate diversification, lower cost and higher flexibility offer makes ETFs a good investment tool.
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