MUMBAI: It has been a tough task for fund managers overseeing diversified equity schemes to match returns of the Sensex and Nifty over the last one year. Both indices have risen around 60% in this period and even the best-performing schemes benchmarked to these indices have just about managed to deliver similar returns.
Unsporting though it may sound, had fund managers chosen a diversified index like the Nifty Junior as their benchmark they would have struggled even more.
The Nifty Junior has delivered an 81% return over the last one year. This is the highest return that a diversified index has given over the last one year. The banking and capital goods indices have given higher returns close to around 100% but these are sector indices and sometimes one stock can account for around 30-40% of the index.
Strangely, none of the fund managers benchmark their portfolio performance to any of the NSE indices. When asked, most of them claim that the reasons are traditional more than anything else. “It is unfair to compare the Nifty Junior with diversified indexes,” says Nipun Mehta, director and CEO Unites Tower wealth advisors. “Not a single mutual fund scheme benchmarks their returns against this particular index (Nifty Junior) and rightly so. Most mutual funds schemes prefer to benchmark them against the Sensex or the BSE 200. The reasons are partly cultural and partly because the BSE 200 does give a decent portfolio for comparison,” he adds.
Incidentally, the Nifty Junior ETF from Benchmark Mutual Funds, with a corpus of Rs 80 crore, is slowly gaining acceptance among professional investors. Investors who feel that the large-cap indexes have higher valuations are looking at stocks that are not a part of the mid-cap segment or the large-cap Nifty index. These investors take the Nifty Junior stocks seriously.
Again, three of the biggest themes for investing in India — banking, finance and infrastructure — account for 43% of the Nifty Junior. This same ratio in the Nifty index accounts for 25%. In terms of valuation, the Nifty Junior is a pure growth index with a forward P/E of 24.78 times which is higher than the 23 times for Nifty and 21 times for the mid-cap index.
Fund managers agree that the Nifty Junior is a 50-stock index and is considered the incubator of the Nifty. Thus unlike the mid-cap stocks, this index is considered highly liquid and has the ability to give returns that are at par with the mid-cap index. Mid-cap index are considered high risk and high return bets as they suffer from liquidity risks when a downward correction sets in.
Liquidity is measured in terms of impact costs. If impact costs are high, it means buying and selling of stocks becomes difficult. Low impact costs ensures high liquidity of the stock irrespective of volume of stock available in the market. The Nifty has an impact cost of 0.09% for a portfolio of Rs 50 lakh and the Nifty junior has an impact cost of 0.17% for a portfolio of Rs 25 lakh. The NSE does not calculate the impact cost of the mid-cap index but fund managers assure that it will be more than double the cost of the Nifty Junior for a portfolio of Rs 25 lakh.
This is what differentiates the Nifty Junior and the NSE Midcap Index even if the returns of both the indices is similar. Interestingly, the Nifty Junior has higher risk as compared to the Midcap Index. Risk which can be measured in terms of standard deviation shows that the Midcap Index has a risk of 1.47% and the Nifty Junior index has the same number at 1.70%. Experts attribute this aspect to the fact that the mid-cap has 100 stocks and is more diversified while the Nifty Junior has only 50.
Unsporting though it may sound, had fund managers chosen a diversified index like the Nifty Junior as their benchmark they would have struggled even more.
The Nifty Junior has delivered an 81% return over the last one year. This is the highest return that a diversified index has given over the last one year. The banking and capital goods indices have given higher returns close to around 100% but these are sector indices and sometimes one stock can account for around 30-40% of the index.
Strangely, none of the fund managers benchmark their portfolio performance to any of the NSE indices. When asked, most of them claim that the reasons are traditional more than anything else. “It is unfair to compare the Nifty Junior with diversified indexes,” says Nipun Mehta, director and CEO Unites Tower wealth advisors. “Not a single mutual fund scheme benchmarks their returns against this particular index (Nifty Junior) and rightly so. Most mutual funds schemes prefer to benchmark them against the Sensex or the BSE 200. The reasons are partly cultural and partly because the BSE 200 does give a decent portfolio for comparison,” he adds.
Incidentally, the Nifty Junior ETF from Benchmark Mutual Funds, with a corpus of Rs 80 crore, is slowly gaining acceptance among professional investors. Investors who feel that the large-cap indexes have higher valuations are looking at stocks that are not a part of the mid-cap segment or the large-cap Nifty index. These investors take the Nifty Junior stocks seriously.
Again, three of the biggest themes for investing in India — banking, finance and infrastructure — account for 43% of the Nifty Junior. This same ratio in the Nifty index accounts for 25%. In terms of valuation, the Nifty Junior is a pure growth index with a forward P/E of 24.78 times which is higher than the 23 times for Nifty and 21 times for the mid-cap index.
Fund managers agree that the Nifty Junior is a 50-stock index and is considered the incubator of the Nifty. Thus unlike the mid-cap stocks, this index is considered highly liquid and has the ability to give returns that are at par with the mid-cap index. Mid-cap index are considered high risk and high return bets as they suffer from liquidity risks when a downward correction sets in.
Liquidity is measured in terms of impact costs. If impact costs are high, it means buying and selling of stocks becomes difficult. Low impact costs ensures high liquidity of the stock irrespective of volume of stock available in the market. The Nifty has an impact cost of 0.09% for a portfolio of Rs 50 lakh and the Nifty junior has an impact cost of 0.17% for a portfolio of Rs 25 lakh. The NSE does not calculate the impact cost of the mid-cap index but fund managers assure that it will be more than double the cost of the Nifty Junior for a portfolio of Rs 25 lakh.
This is what differentiates the Nifty Junior and the NSE Midcap Index even if the returns of both the indices is similar. Interestingly, the Nifty Junior has higher risk as compared to the Midcap Index. Risk which can be measured in terms of standard deviation shows that the Midcap Index has a risk of 1.47% and the Nifty Junior index has the same number at 1.70%. Experts attribute this aspect to the fact that the mid-cap has 100 stocks and is more diversified while the Nifty Junior has only 50.
No comments:
Post a Comment