Mutual Funds

Benchmark Junior Nifty Exchange Traded Fund: Buy

Aarati Krishnan | Updated on August 13, 2011

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The 21 per cent fall in the Indian stock market bellwether from November 2010 highs presents a buying opportunity for long-term investors in stocks. But with crude oil plummeting, commodity prices levelling out, and the global economic scenario turning uncertain once again, the key dilemma for the investor is, What to buy? Is it to be commodity stocks or manufacturers? Consumer stocks or infrastructure? Large-caps or mid-caps? With no easy answers, the best way for investors to benefit from this opportunity is to buy an index that offers a little bit of everything.

To own a set of quality companies with potential for high returns, there appears to be no better bet than the Nifty Junior Index. The stocks making up this index can be bought for as little as Rs 103.6 (price of one unit, the minimum lot) by investing in the units of the Exchange Traded Fund- Benchmark Junior BEES on the stock exchanges. There are four key reasons to buy Junior BEES now.

The most liquid mid-caps: Made up of 50 stocks that constitute the most liquid names in the stock market outside the Nifty, the Junior Nifty is an ‘incubator' for the bellwether. The quality companies figuring in this index mitigate two big risks of mid-cap investing- low liquidity and governance issues.

Attractive valuation: After a 24-per cent drop since November 2010, the Junior Nifty's price-earnings multiple is at a modest 13.5 times (trailing 12 month earnings). That's at a discount to the Nifty's 18.5 times.

Contrarian bet: With a 31 per cent weight in banks and financial stocks, a near 12 per cent weight in infrastructure and power stocks and a 3 per cent exposure to autos, the Junior BEES basket is heavily tilted towards interest rate sensitive sectors. These sectors have been at the receiving end of the recent correction, on worries about RBI's rate increases hurting growth. Whether interest rates will peak out soon is not easy to say, but valuations in these sectors certainly look attractive enough for investors with a 3-5 year horizon to buy into. Sectors such as pharma and consumer too make up 11 and 12 per cent respectively.

High return potential: The Nifty Junior index has been a frontrunner in every bull market, beating the Nifty by a fair margin. Few diversified equity funds in fact manage to beat it in a bull market. However, this ‘high beta' nature of the Junior BEES makes it a high risk proposition in a falling market.

Investors buying into this fund are advised to brace for sizeable declines in the short term if the market continues to fall.

However, buying the units in lots to phase out your investment may help maximise the return potential over a five-year period.



Published on August 13, 2011

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