GS Nifty beES - review as on oct 09, 2012

1

Mutual Fund Scheme Analysis October 09, 2012

GS Nifty BeES – a review:
Rationale behind investing in an Index:

Investing in an index is considered as efficient investment option as the index includes large actively traded
stocks from diversified and performing industries.
Indices are revamped periodically representing the changes in the importance of sectors and growth cycle
of stocks. The world changes, so the index should change.
Investors benefit out of these changes as they need not take a call on entering or exiting a particular sector
or stock.

Rationale behind investing in GS Nifty BeES:
GS Nifty Bees gives a chance to
Participate in the most happening large cap stocks that will ride on growth in Indian economy,
Incur low cost in terms of expenses of scheme (compared to a diversified fund) or lower transaction costs
(in the case of direct equity requiring frequent reshuffling),
Go in for SIP and take advantage of volatility in the markets to arrive at a lower entry level,
Avoid possibility of underperforming the benchmark,
Avoid the need of constantly monitoring and reviewing portfolio.

Prologue - ETFs: Exchange-Traded Funds (ETFs) are preferred investment products by investors for their
uniqueness of getting access to broader market indices, diversified investment approach, low cost structure and
transparency. They are passively managed funds investing in the securities comprising an index in a proportion
which the securities are present in that index. They are listed and traded on stock exchanges so that they can be
bought and sold on the real time basis like equity shares.

GS Nifty BeES Retail Research

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Mutual Fund Scheme Analysis contd…
Passively managed Mutual Funds: Passively managed funds are mutual fund schemes that are designed to match
the returns on a particular stock market index. They do simply follow the index, construct the portfolio in
proportion to the index constituents and generate the return in line with the index.
The other type of mutual funds are called as actively managed mutual funds which are managed actively by the
fund managers. Unlike passively managed funds, actively managed funds are mandated to outperform the
respective benchmarks by using the skills set of the fund managers.
Index Funds and ETFs: There are two types of passively managed funds available in the mutual fund spectrum,
called as Index funds and ETFs.
Index funds and ETFs vary each other mainly in terms of tradability on the exchanges. ETFs are listed on the
stock exchanges and traded in the real time basis like equity shares while the Index funds are not listed on any
exchanges whose NAVs are calculated and declared once in a day like other normal mutual funds.
In this note, we cover the features of ETFs and review the performance of GS Nifty BeES which is the index
ETF with the largest corpus and the most liquid index ETF.
Suitability: ETFs are suited for conservative investors who want to follow and are willing to get returns in line
with index returns. First time investors who wish to enter into equity market, can consider opting the index ETF
route. Investing through staggered investment mode like DIY SIP will further help them to accumulate cost
averaging units over periods.
However, Investors have to own a demat account and a broker’s account to participate in the investment
process of ETF transaction.
Best investment option to achieve long term goals: ETFs are considered as one of the investment options to grow
the wealth over long run. It is noteworthy to say that most of the ULIPs and New Pension Funds prefer to include
ETFs in their portfolio to achieve their long term objectives. The Finance Minister has approved to bring broader
indices ETFs under Rajiv Gandhi Equity Saving Scheme as eligible securities.


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Advantages of ETFs:
Lower expense ratio: ETFs are less expensive in comparison to actively and other passively managed schemes.
The expense ratio of ETFs is the lowest among mutual fund schemes which ranging from 0.25% to 1%. Index
Funds charge between 0.75% to 1.5% while actively managed funds charge up to 2.5% of the net assets. The low
expense ratio of ETFs is mainly attributable to passive investment nature hence there is no need of requiring the
service of fund managers and analysts. Moreover, there is less marketing cost and commissions. The average
expense ratios for ETF category as on Sep 2012 was at 0.87% (including gold ETFs).
Diversification: The investment through ETFs are widely diversified as indices are constructed to represent
performance of the stock market as a whole. It reduces the overall risk of one’s portfolio. Apart from major
indices such as Sensex and Nifty, fund houses have bestowed investors an opportunity to diversify their portfolios
through market capitalization (ICICI Nifty Junior, IDBI Nifty Junior and Junior BeES providing investment
opportunities in mid cap space), focusing on industry (Bank BeES & Infra BeES), asset class (liquid and Gold) and
explore in global arena (Hang Seng BeES).
Transparency: Investors can access the portfolio composition of index any day at any point of time. On the other
hand, portfolios of other mutual funds schemes are declared by AMCs once in a month.
No fund manager Risk: As the objective of such schemes is to mimic the performance of index which they track,
they construct the portfolios same as the tracking indexes. So these funds stay away from the risk of subjective
performances and biases of fund managers.
Liquidity: ETFs are listed and traded on stock exchanges like equity shares. They can be bought and sold on real
time basis at currently available prices at any time during trading hours. However, AMCs arrange to absorb any
excess supply of units that an investor would like to sell or create fresh units when the demand for units is large
enough. On the other hand, other funds including index funds that are available only at day-end NAV.
Simplicity: There is no separate form filling and can be traded by just a phone call. Investors have the ability to
put limit orders.
Others: There is an arbitrage opportunity available between Futures and Cash Market. Above all, passive funds
provide better downside protection than actively managed schemes during downturns.


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Disadvantages of ETFs: On the downside, there are some drawbacks associated with ETFs.
Demat account: Demat account and broker’s accounts are mandatory for an investor to participate in the ETF
trading as they are traded in stock exchanges. No demat and broker accounts are necessary in case of index and
other mutual funds transactions.
Brokerage Charges: Brokerage and other transaction charges need to be paid when trading in ETFs. It can be
minimized by trading less but the very charm of ETFs is affected because it is meant for being traded more often
than an index fund.
Premiums and Discounts: An ETF might trade at a discount to the underlying shares. This means that although
the index might be doing very well on the bourses, yet the ETF might be traded at less than the market value of
the index.
SIP in ETF is not convenient as you have to place a fresh order every month and also SIP may prove expensive as
compared to a no-load, low-expense index funds as you have to pay brokerage every time you buy & sell.
True Replication: The index and ETFs may not replicate the returns of underlying index due to management
expenses, cash holding and so on which result in higher tracking error.
Inbuilt Cost: Impact cost is higher than its constituents. Transaction costs like brokerage charges need to be paid
anyway when trading in ETFs.
Comparison of ETFs, Stocks and Mutual Funds:

*= Including Index funds and non Index funds


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GS Nifty BeES vs. Nifty Futures:

ETFs vs. Index funds:


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Goldman Sachs Nifty Exchange Traded Scheme (GS Nifty BeES)

Features of GS Nifty BeES:

First Exchange Traded Fund (ETF) in India.
Combination of a share and a mutual fund unit.
Real-time Trading on NSE.
Real-time Indicative NAV.
Available across NSE terminals.
Tracks the S&P CNX Nifty Index.
Priced at 1/10th of the Nifty Index.
The maximum total expense ratio is 0.80% per annum.
Structured as a Mutual Fund under the SEBI 1996 regulations.

Advantages of GS Nifty BeES:

Simple – Can be bought/ sold on NSE like a share…real-time.
Economical – No load scheme. Annual expense is one of the lowest for any mutual fund scheme in India.
Diversification – It’s a cost efficient way to invest in a basket of securities.
Equitable Structure – Long term investors insulated from short term trading activity.
Transparent – Investors have access to information on the portfolio constituents represented on a daily
basis.


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GS Nifty BeES – Scheme Details:

NSE Symbol :NiftyBEES.
BSE Code :590103.
ISIN :INF732E01011.
Reuters :NBES.NS.
Bloomberg :NBEES.IN.
Closing Price :571.40 (Rs as on Oct 08, 2012)
NAV :574.82 (Rs as on Oct 08, 2012)
Expense Ratio :0.50% (as on Sep ’12)
Tracking Error :0.12%*
Issued Cap :1,00,67,476(shares) as on 08-Oct-2012.
Market Cap :575.85 (Crore) as on 08-Oct-2012.
52 week high/low price :585/462.85.
Impact cost :0.10 (as on Sep ’12)
Entry / Exit Load :Nil.
P/E multiple of Nifty :17.64 (as on 31 Aug 2012)
P/B multiple of Nifty :2.87 (as on 31 Aug 2012)
Dividend yield of Nifty :1.57% (as on 31 Aug 2012)
Note:
•*- Tracking Error is calculated based on daily Rolling Returns for last 12 months (Source: NAVIndia).


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Relative performance of GS Nifty BeES:

Note: Trailing Returns up to 1 year are absolute and over 1 year are CAGR. NAV/index values are as on Oct 08, 2012. Portfolio value as on Aug 2012. TE is calculated based on daily Rolling Returns for last 12 months.

Daily traded volume in GS Nifty BeES on NSE:
100

80

60
(Rs Crs)

40

20

0
J ul-09

N ov -09

J an-10

Mar-10

May -10

J ul-10

N ov -10

J an-11

Mar-11

May -11

J ul-11

N ov -11

J an-12

Mar-12

May -12

J ul-12
Sep-09

Sep-10

Sep-11


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Discount (+) / Premium (-) of Spot Price to NAV over the last five months:

Average of Discount (+) / Premium (-) of Spot Price to NAV over the last five months:
25%
19.1%
20%
15%
8.7%
10% 7.0%
2.2% 2.8% 3.1%
5% 0.3% 0.3% 0.3% 0.3% 0.5% 0.7% 0.7% 0.9% 1.4% 1.6%
-0.2% 0.1%
0%
-5% -0.4%

GS PSU Bank ETS
IIFL Nifty ETF

MOst NASDAQ 100 ETF

MOSt Midcap 100 ETF
MOSt Shares M50 ETF
Quantum Index ETF

ICICI Spice
Gs Nifty Junior ETF

GS Banking ETF
GS Hang Seng ETF

Reliance Banking ETF
GS Nifty ETF

GS Infra ETF
Kotak Nifty ETF

Religare Nifty ETF
GS Shariah ETF
Kotak Sensex ETF
Kotak PSU Bank

Birla Sun Life Nifty ETF

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How do ETFs Function?
ETFs vary from normal mutual funds in terms of the functionality, the manner in which they are created, bought
and sold. In normal mutual funds, investors pay cash to the fund house, which in turn buys the securities and
constitutes the fund.
In case of ETFs, the fund house appoints market makers in the stock market to execute all the transactions on
behalf of the fund house. The market-makers, also called as arbitrageurs or Authorized Participants (APs) involve
into the following four distinct transactions;
1. The Authorized Participants purchase a basket of shares, as specified by the fund house, for cash.
2. This basket of securities is then exchanged with the fund house for a set number of ETF units (creation).
3. The Authorized Participants then satisfy market demand by doing buy/sell orders (and sell/redeem these
units to investors just like a distributor does).
4. The Authorized Participants are performing an arbitrage between the ETF and index to keep the market price
of the ETF close to its NAV.
The Authorized Participants are empowered to create or redeem ETF units. They buy the basket of securities
(such as all the scrips of the market index as specified by fund house) and hand it over to the fund house, in
exchange of a certain number of units (which are usually 50,000 or a multiple thereof). This process is called
unit creation, whereby ETF units are “created” in exchange of a basket of securities.
The Authorized Participants then break up these units and sells them separately on the stock exchange. Investors
can then buy and sell these units through the stock exchange.
The Authorized Participants also redeem the ETF units by delivering them to the fund house in return for the
securities represented by those units. Note that the exchange of ETF shares and the securities they represent
between the Authorized Participants and the fund house is an in-kind exchange—there is no exchange of cash.
This also lowers taxes for the ETF sponsor, thereby lowering the fund’s fees.


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How ETFs work?

Primary market Secondary market

Seller

Cash ETF Units

Authorized Buy / sell
Participants / Stock Exchange
Market making /
FI Arbitrage

Creation Redemption Cash
in-kind in-kind ETF Units

Fund Buyer


12

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Tracking Error:
Investors in an ETF buy or sell a security representing shares in the underlying index fund. They do expect the
price of the ETF to closely track the value of the underlying Index. They also want a sense of how closely the
ETF returns correlate with those of the index. Tracking error helps out the investors to measure as to how
closely the ETF tracks the underling index.
Tracking error is a statistical term commonly used to describe the volatility of returns of a ETF relative to the
returns of its benchmark index. It is typically expressed in terms of the standard deviation of the differences
between ETF and index returns over a specific horizon. It can be interpreted as the range around the index
return in which ETF returns are expected to be. For example, a tracking error of 1% implies that if the index
return is 10%, the ETF return should be 9%-11% about 68% of the time.
Tracking Error tells how much an ETF's returns deviate from the benchmark index's returns over any given period
of time. An ETF fund manager needs to calculate his tracking error on a daily basis especially if it is open-ended
fund. Lower the tracking error, closer are the returns of the fund to that of the target Index. For investors’ point
of view, the lower the tracking error, the better is the ETF.
Annualized Tracking Error (TE) calculated for one year period ending:
Kot ak Sensex ETF 0.03
ICICI Pru SPIcE Fund 0.06
Birla Sun Lif e Nift y ETF 0.10
Kot ak Nift y ETF 0.10
Quant um Index 0.10
IIFL Nift y ETF 0.10
GS Nif ty BeES 0.15
Religare Nif ty EETF 0.17
M OSt Shares M 50 ETF 0.39
GS Shariah BeES 0.40
M oSt M idcap 100 ETF 0.66
GS Junior BeES 0.66
GS Inf ra BeES 0.83
R* Shares Banking ETF 0.85
GS Bank BeES 0.87
Kotak PSU Bank ETF 1.42
GS PSU Bank BeES 1.42

0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60


13

Mutual Fund Scheme Analysis
No

Analyst: Dhuraivel Gunasekaran. (Database sources: AMC Sites, NAVIndia & Ace MF)

HDFC Securities Limited, I Think Techno Campus, Bulding –B, ”Alpha”, Office Floor 8, Near Kanjurmarg Station,
Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone (022) 30753400 Fax: (022) 30753435
Disclaimer: Mutual Fund investments are subject to risk. Past performance is no guarantee for future performance. This document has been
prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or
copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The
information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied
upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time
solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for non-
Institutional Clients.


GS Nifty beES - review as on oct 09, 2012

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