Geopolitical tensions and consequent correction in the stock market prompted many investors to park their money in Nifty BeEs, an exchange-traded fund (ETF) that mimics the S&P CNX Nifty Index. Introduced first in January 2002, this instrument is available on the National Stock Exchange (NSE) only and can be bought and sold just like shares through a Demat account. This means that the ETF units that you buy and sell would be in dematerialized format. Those looking to benefit from diversification of their investments can invest in it regularly as the returns mirror the returns earned from the movement of the stocks listed in the Nifty50 Index. Since Nifty BeEs is an ETF, you can buy and sell the units at its real-time Net Asset Value (NAV) or the price at which it is being traded.
Investing in Nifty BeEs is not different from how you invest in shares. This means that these ETFs trade like shares on the NSE in rolling settlements. Gaurav Rastogi, CEO, Kuvera.insays, “Rolling settlement means that trades are settled on an ongoing basis based on the date the trade was made. As a simple example, a T+1 rolling settlement means that trades will reflect in your account the next business days after the trade date. Rolling settlement is an upgrade to account settlement, where trades are done over a certain period, usually, five days were settled all at once.”
How much do Nifty BeEs cost?
Most investors prefer Nifty BeEs over mutual funds because of their cost-effectiveness. The expense ratio of Nifty BeEs is 0.80 per cent, which comes down to 0.65 per cent for ETFs with assets under management (AUM) exceeding ₹5 billion. This explains how putting money in Nifty BeEs is more economical compared to most mutual funds in India.
Rahul Agarwal, Financial Life Planner & Investment Advisor, Advent Financial (Registered with SEBI as RIA) says, “The total cost of ownership can be optically higher for ETFs via the expense ratio, brokerage, Demat account, etc. But even index funds would be incurring these charges though they may not be apparent. For buy and hold in ETFs, the lower expense ratio can work in favour of investors if the ETF is a liquid one and trades without any significant bid/ ask spread over the longer term.”
Mutual fund returns differ also due to the fund manager’s bias in favour of certain sectors over others. The returns from Nifty BeEs are similar to those earned from S&P CNX Nifty. This frees them of fund manager bias, thus, allowing investors to benefit from the undulating stock movement that allows them to earn when the market is up while allowing more scope for investment when the market belongs to the bears.
Another factor that affects investing decisions is the extent of liquidity of investments that one makes. Since Nifty BeEs are traded in the capital market as investors can buy or sell them at ease in the market. Also, investors apprehending a sudden fall or rise in the stock market movement can place a limit order accordingly, thus, allowing them to buy and sell ETF units at their choice of price. However, there is not too much hassle involved in redeeming the index mutual fund units, thus, making these funds equally liquid in nature.
However, some personal financial advisors may have a different take on the same. Suresh Sadagopan, founder, Ladder7 Financial Advisories, says, “I would recommend Index funds as the counterparty is the AMC and hence there is assured liquidity; impact cost is lower and one does not need a Demat account and a broker to carry out buying or selling NIFTY BeEs. Index funds are also get reported along with other MFs and hence is convenient.”
The benefit of diversification
Whoever said that you must induce diversification in your portfolio to divert and distribute the risk could not be more true. Investing in Nifty BeEs means that you are parking money in an investment that gives you exposure to the 50 shares listed in S&P CNX Nifty. Since every ETF unit gives you exposure to the effect of the shares’ movement, investing in them allows you the diversification pursuant to investment in every kind of sector or theme irrespective of whether the listed companies are categorized as large-cap, mid-cap or small-cap companies.
How do you invest in Nifty BeEs?
Many investors refrain from the idea of parking money in Nifty BeEs misconstruing the investing process as lengthy and cumbersome. However, investing in Nifty BeEs is like buying equity shares using the trading and Demat accounts, which means that both traders and investors can buy and sell its units at any time during the market hours at the existing market rates. However, unlike mutual funds that do not charge brokerages on investments, paying for Nifty BeES attract brokerage fees similar to buying equity shares.
Some invest in shares to benefit from the dividends the companies promise every year. The sizeable dividends when added up make up for the sudden losses in the market when the share prices slip down to a 52-week low. However, investors of Nifty BeEs are not guaranteed any dividends as a lot depends on the surplus funds left with the mutual fund house. Decisions regarding the dividend payouts, dividend amount and frequency are taken by the fund trustees who announce and pay dividends after deducting from them the applicable tax deducted at the source (TDS). The fund house pays the dividends within a month of the date of declaration. The fund house may settle the dividends via cheque, Real-Time Gross Settlement (RTGS) and Electronic Clearing System (ECS). However, unlike some companies that guarantee dividends to their shareholders every year, the dividends payout and frequency in the case of Nifty BeEs are not guaranteed.
Agarwal explains, “Unlike mutual fund schemes that offer an option of choosing between the dividend payout option wherein a portion of the gains is paid to unitholders in the form of dividends made by the scheme and the growth option where the gains are accumulated and reflected in the unit price aka NAV, in the case of Nifty BeEs, there is no explicitly stated option as such but as a matter of practice dividends are not paid out. The easiest way to think of this is similar to the growth option of a mutual fund scheme.”
Taxation of Nifty BeEs
There is not much difference between how Nifty BeEs and index funds are taxed. For taxation purposes, these ETF schemes are treated like equity mutual funds. Rastogi adds, “The short-term capital gains made on investing in Nifty BeEs, i.e., less than one year holding period are taxed at 15 per cent. However, if you continue to hold the same investments for a prolonged period, i.e., more than a year, the earnings from them are taxed at 10 per cent, sans the indexation benefit.”
Why invest in Nifty BeEs?
If you are not sure about how to plan your investment portfolio or realize that you do not have the acumen to assess the intrinsic value of stocks and buy them accordingly, you may put your money to buy some Nifty BeEs units depending on how much you wish to invest. As opposed to deciding your allocation between shares of all the 50 companies listed on the stock exchange, one can directly think of investing in the units of these ETFs. Since this kind of ETF replicates the companies listed in S&P CNX Nifty, investors derive satisfaction from its inherently transparent nature. Besides, its listing on the NSE means that there is no liquidity problem that restricts or sabotages other investment options.
More people are now warming up to the idea of putting money in Nifty BeEs to gain from the continued market movement that investing more during dips while continuing regular investments through systematic investment plans (SIPs). For example, more investors took advantage of the market correction on May 20, 2022, to pour their earnings into these ETFs. Statistics point out investments to the tune of ₹350 crores, the highest volume of investments clocked in these ETFs to date. Prior to this, when the market corrected sharply in December 2021, investors had offloaded around ₹205 crores of their earnings into these ETFs.
While investors prefer to stick to making systematic and structured investments throughout their investment journey, many of them invest in lump sums during the big dip as they are unsure of which stock to pick or buy. Be the simplicity of the product that is simply an imitation of the stock market behaviour, low expense ratio, a greater affinity for equity allocations or increased penetration of Demat accounts over the last decade, trading volumes in Nifty BeEs are now more than ever before. Initially ignored as a plain vanilla product, Nifty BeEs are here to stay with more people intent on diversifying their portfolio while struggling to earn returns in sync with the market.