 "Strategy indices: Only for seasoned investors")
Sunil Singhania, chief investment officer (equities), Reliance Mutual Fund, is quite gung-ho about smart exchange-traded funds (ETFs). He believes this is the next level of investment strategy which many retail and even institutional players will follow.
"There are active funds, passive (index funds) and smart ETFs. The latter category uses smart strategies like highest alpha or beta or dividend opportunities. In global markets, there are many such exotic ETFs. There are double index ETFs, double or triple short ETFs and so on. In India, too, ETFs are evolving, which is good for the longer term."
'Bang for the buck' is something retail investors always look for while investing in mutual funds or direct stocks. Fund managers in India have always complained the investor is never happy with passive participation despite investing in an index fund.
Consequently, even index fund managers in India have to aggressively buy and sell, leading to tracking errors, both on the positive or negative side. Tracking error is a measure of how closely a portfolio behaves vis-a-vis the index to which it is benchmarked. Thus, if the return of an index fund based on the Nifty-50 is even two per cent more than the benchmark, it is considered a tracking error, even if the return is better. It shows the fund manager is actively playing the market, instead of simply following the benchmark index.
Strategy indices or smart ETFs are the next level. Recently, stock exchanges like the BSE and National Stock Exchange (NSE) have started coming out with such indices, ones that can be used to build a portfolio, depending on your risk profile.
ETFs
Niraj Gajra, for example, wanted to include stocks of high dividend paying companies in his portfolio, as such businesses tend to do well in uncertain times. However, researching these based on their dividend paying history, track record and other parameters was time consuming and there was no readily available data. That's when he came across R*Shares Dividend Opportunities ETF, a scheme that tracks the NSE's Nifty Dividend Opportunities 50 Index.
The index had 50 stocks selected from the top 300 listed on the exchange that have a positive net worth, are profitable and based on other established parameters. The best part was that it was compiled by the country's eminent exchange. The top five companies by weight at the end of October were Hindustan Unilever (10.34 per cent), ITC (9.77 per cent), ONGC (8.52 per cent), Coal India (7.91 per cent) and Bajaj Auto (6.69 per cent). Rather than buying individual companies, Gajra invested part of the money in the ETF.
Others
NSE has 14 such indices and BSE has 10. Some of the former's are the Alpha 50 Index, High Beta 50 Index, Low Volatility 50 Index, Nifty Quality 30 Index, and Growth Sectors 15 Index. Experts say while there are no funds available as of now to take exposure to these, investors can use them to add stocks to their portfolio.
Navneet Daga, senior analyst at IIFL, says stocks in these indices can be a good starting point to pick stocks if an investor wants to follow a certain strategy. It exposes investors to a universe of limited stocks that are already narrowed down, based on certain parameters. They will need to delve deeper to pick the winners.
Shukla says beta strategy ETFs are popular in developed countries, as these stocks see higher movement than their index. In India, there's no ETF available for such stocks but investors can use the NSE index. However, it comprises 50 stocks in different weights. That's why investors will need to do their own research to arrive at select stocks they'd like to include in their portfolio.
Caution
Usually, these strategies are used depending on the market conditions, says Shukla. When the markets are sideways, dividend paying companies might do well; in a falling market, value stocks perform, and, in a rising market, high alpha and high beta stocks shine.
In developed markets, advisors take a call on the market condition and recommend a strategy to investors. If you don't have an expert advising you, experts say you need to be cautious.
Soman Udasi, research head at Tata AMC, says while the indices are a good screener to start with, an investor needs to be experienced enough to understand what the stock strategy is. They need to understand the strategy that suits their risk profile. A high alpha strategy might work for an aggressive investor, while a value one might for a conservative one.
Hitendra Parekh, fund manager, Quantum Index Fund, Quantum AMC, says one of the challenges investors would face is keeping track of underlying securities in the index. Take Nifty Growth Sectors 15. The weight of ITC in the index was 15.5 per cent, Infosys' 14.66 per cent and TCS' 14.04 per cent as on October 30. If the investor needs to follow the index, every Rs 100 he puts in these 15 stocks need to be spread in line with the weight of each company. However, the weight changes regularly and NSE only gives out the data once a month, as this is a paid service for institutional investors.
Bodke says an investor will also need to look at the criteria followed to make the index. For example, NV20 is shortlisted from the top 50 companies, whereas Nifty Quality 30 Index shortlists stocks among the top 200. If the investor uses a value index for stock picking, he or she might miss on mid-cap and small-cap opportunities. Until fund houses launch ETF strategies, an investor should only use the indices as the first step towards stock selection.
