Indian investors will soon be able to buy a foreign exchange-traded fund (ETF) listed on the National Stock Exchange (NSE). The coming Monday will see NSE list the Hang Seng BeES, an open-ended index scheme, which tracks the Hang Seng on a real-time basis.
Promoted by Benchmark Mutual Fund, this will be the first foreign ETF which will enable investors to take exposure to a hitherto closed market like China.
"All the regulatory approvals are in place and we will go live from February 15," Sanjiv Shah, ED, Benchmark Mutual Fund, told ET confirming the development. "Hang Seng BeEs will enable an Indian investor to buy into the largest manufacturing economy in the world (China)," he added.
ETFs are just what their name implies: baskets of securities that are traded, like individual stocks, on an exchange. Unlike regular open-ended mutual funds, ETFs can be bought and sold throughout the trading day like any stock.
Most ETFs charge lower annual expenses than index mutual funds. However, as with stocks, one must pay a brokerage to buy and sell ETF units, which can be a significant drawback for those who trade frequently or invest regular sums of money.
Fund managers at foreign brokerages who track ETFs globally believe that this is one more diversification opportunity for the Indian investor, but more specifically for high networth individuals (HNIs).
"China is a market everyone wants to be a part of. But how many Indian investors track it on a real-time basis or keep up with market trends there? This ETF will be a quick and easy way of accessing Chinese markets," said the head-equity products at a foreign brokerage on condition of anonymity.
Significantly, India ETFs have been gaining ground overseas, as a low-cost option to get exposure to the Indian stock market in a diversified, low-cost portfolio. A query as to the timing of such a product elicited the response that this is a structural trend and not a cyclical one. "It is better to launch a product in volatile market conditions and take it slow and easy," a fund manager added.
Interestingly, last Friday when the market witnessed an unusually high degree of volatility, Rs 50 crore worth of Nifty BeEs were traded. Benchmark Mutual Fund currently has five equity ETFs being traded on the NSE, Nifty BeEs, Junior Nifty, Bank BeEs, Shariah and PSU BeEs.
Officials said that there is no entry or exit load on Hang Seng BeES purchased and sold on the NSE. However, an investor will have to pay a fee in the form of a bid and ask spread and brokerage and other charges as may be levied by his broker.
The asset allocation of Hang Seng BeES will be 90-100% into securities constituting the Hang Seng Index and 0%-10% into money market instruments, low G-Secs, bonds, debt instruments, cash at call and mutual fund schemes/overseas exchange-traded funds based on the Hang Seng index.
What are derivatives? Derivatives are financial instruments, which as the name suggests, derive their value from another asset — called the underlying. What are the typical underlying assets? Any asset, whose price is dynamic, probably has a derivative contract today. The most popular ones being stocks, indices, precious metals, commodities, agro products, currencies, etc. Why were they invented? In an increasingly dynamic world, prices of virtually all assets keep changing, thereby exposing participants to price risks. Hence, derivatives were invented to negate these price fluctuations. For example, a wheat farmer expects to sell his crop at the current price of Rs 10/kg and make profits of Rs 2/kg. But, by the time his crop is ready, the price of wheat may have gone down to Rs 5/kg, making him sell his crop at a loss of Rs 3/kg. In order to avoid this, he may enter into a forward contract, agreeing to sell wheat at Rs 10/ kg, right at the outset. So, even if the price of wheat falls ...
