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Investors with a two-three year perspective can consider accumulating Nifty Benchmark Exchange Traded Scheme (Nifty BeES), an exchange-traded fund that mimics the S&P CNX Nifty Index in returns, at its current market price of Rs 269. It offers a good entry point for investors, both seasoned and first time, seeking a diversified exposure to a basket of quality stocks for the long-term. But what’s more attractive is the compelling valuation of the Nifty-50 index.

After Friday’s fall, the Nifty’s PE multiple has been reduced to about 9 times its trailing four quarter earnings (according to Bloomberg). This is not only way below its peak of about 28 times, but also the current valuations compare with levels last seen briefly in May-2003. Further, the large cap bias offered by the Nifty basket may also be more worthwhile in the current challenging macro environment. The Nifty BeES also scores over other index funds due to its low tracking error and expense ratio, apart from easier tradability as it is listed in the NSE.

However, note that our investment argument stems more from the long-term growth potential of the index than on the supposition that markets may have bottomed out.

Investors who are worried about further downside in the Nifty in the near term can also consider using index options. Doing so will help you postpone your purchase to a later date to a price you will be comfortable with. There are two ways to do this. One, you start accumulating Nifty BeES at current market levels and hedge your purchase by buying Nifty puts (since Oct contracts will expire this week, it is advisable you choose far month contracts). Buying puts gives you the right to sell the underlying index at the strike price for which it was bought, and hence will reduce the downside risk for your investments. Two, you can postpone the purchase of index ETFs and yet not miss any interim gains in the index by buying Nifty call options.

So, if the index moves up before you buy the ETFs, your call options premium will expand and to an extent make up for the missed opportunity. Call options give the buyer the right to buy the underlying at a fixed price on a specified date. The strike prices of the options involved can be chosen depending on your near-term view of the market. However, since one lot of Nifty options has 50 shares, it will make more sense to use these strategies only if you are planning to buy atleast 50 units of Nifty BeES.

Srividhya Sivakumar

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