investmentpivot.com

Hello investors,

Indian stock markets have seen a V-shaped recovery with NIFTY making lows of 7,500 in March 2020 when the countrywide lockdown was announced to a high of 15,700 on 3rd June 2021. Even from the pre-covid levels of about 12,200 in Nov 2020, it has given 29% returns so far which is a fantastic return by any measure.

What led to this exceptional return can be attributed to many factors such as huge money inflow from FIIs, India Inc delivering good results (few sectors such as IT & Pharma had the least impact of covid), future growth expected in the economy in the post-covid era. One of the major contributors to this rally has been retail investor participation, all thanks to work from home and lockdown. According to data from SEBI new Demat account additions rose to an all-time high of 10.7 million between April 2020 and January this year. The “Robinhood” investors have had the taste of success in this one side bull run. With the fixed income instruments offering lower returns and the government planning to reduce them further the attractive returns from the stock market are driving new entrants.

One of such new investors who happens to be a friend of mine joined the ride a few months back. He asked me how to get a safe and good return from markets. I asked him “Are you not making money in this bull run?”. He said, yes, but the fear is what if the markets fall and all my profits are gone. That’s it, my dear friend. “Risk Hai To Ishq Hai” was my next dialogue. After all, life is all about taking calculated risks. Isn’t it? And he thought there is no solution to his worry. After a pause I said, but there is a relatively safer option to invest in the stock market. And here comes an instrument called ETF (Exchange Traded Fund).

The Exchange Traded Fund is a fund that trades like a common stock on a stock exchange. The units of an ETF are usually bought and sold through a registered broker of a recognized stock exchange. The units of an ETF are listed on a stock exchange like NSE or BSE. In simple terms, ETFs are funds that track underlying assets such as indexes (CNX Nifty or BSE Sensex), Gold ETF, etc. The movement in the price or NAV of the ETF mimics the movement in the value of the index it is tracking. In other words, if the index rises by 5% then the unit value of fund tracking that index also rises by 5%. It still carries the risk of Nifty falling down, isn’t it? my friend asked. “Yes”, I said. But you see the risk of a particular stock going down is much larger than the whole of the Index. The only scenario it can happen is when there is an unprecedented situation in an economy like countrywide lockdown due to Covid or Lehman Brothers collapse, etc. That creates extreme fear and drives people to sell everything and run away from the market. So, my dear friend, unless India goes on a war with its neighboring countries there will not be any major impact on its economy, and thus Nifty & Sensex would continue their upward journey in a long run.

There are various categories of ETFs in India. Index ETFs- that track Nifty or Sensex, Gold ETFs- that track gold prices, Sector ETFs- that track group of companies in a sector such as IT, Banking, Infrastructure sector, etc, Bond ETFs- that tracks GILT. We even have Global Index ETFs which track the NASDAQ index in the USA. These offer convenient ways to invest in Indian & international stocks or sectoral stocks through ETF mode. Since ETFs track the whole of an index, the expense ratio is also less than the mutual funds. ETFs can be bought and sold at any time of the day during market hours as opposed to mutual funds which are bought at end of the day NAV.

I would advise a new investor in the stock market to initially put a major part (let’s say 80%) of the fund allocated to equities in an index fund, I said to my friend. Balance 20% can stay in good quality Blue Chip stocks. Once you gain a good understanding of how the market behaves and have a sound grip of managing your financial risk should an unexpected fall happens in the stock you own, you can start shifting money from ETFs to individual stocks. This passive investment strategy will help you stay invested in stock markets without losing sleep and maintain a low-risk profile.

Listening to this my friend said, “It sounds like a good plan”.

So friends, if you are new to the market and worried about your hard-earned money then start your journey with index ETFs such as “Nippon India ETF Nifty Bees” or “SBI ETF Nifty 50”. All that is required is a DEMAT account with your broker and you are set to go.

The historical returns of various ETFs are available on financial portals. 5 year returns of a few of them is as below:

Exchange Traded Fund Name –     Returns over last 5 years

Nippon India ETF Nifty Bees     –      15% per annum

SBI ETF Nifty 50                        –     15% per annum

SBI ETF Sensex                           –     15.6% per annum

Kotak Gold ETF                           –     10% per annum

Motilal Oswal NASDAQ 100 ETF –     26% per annum (tracks US IT Index)

Hope you found this information useful! Do let me know your comments on this. Happy Investing! Warm regards,

Mayank Talwar