Nifty BeES vs Index Funds–Analysis (including brokerage costs)

Nifty BeES was the first ETF (Exchange Traded Fund) in India. The investment objective of Nifty BeES is to provide investment returns that, before expenses, closely correspond to the total returns of securities as represented by the S&P CNX Nifty Index. Some of the features of Nifty BeES are -

a) One unit of Nifty BeES is approximately 1/10th of the S&P CNX Nifty Index

b) Nifty BeES is listed and traded on the NSE-Capital market segment and is settled in the rolling segment on T+2 basis

c) Nifty BeES can be settled only in electronic (demat) form.

For the ETF uninitiated, here is a brief note on Mutual Funds vs ETFs – http://getahead.rediff.com/slide-show/2010/mar/06/slide-show-1-money-mutual-funds-versus-exchange-traded-funds-what-should-you-choose.htm

Here is a note on Nifty BeES itself – http://www.masterandstudent.com/2008/10/what-is-nifty-bees-etf.html

The objective of this blogpost is to compare returns of Nifty BeES vs Index funds. Index funds can be based on Sensex or Nifty. For the purpose of this blogpost, Index funds mean Index funds based on Nifty.

About a year ago, I researched on the Internet quite extensively on the returns of SIPing in Nifty BeES versus Index funds. Conceptually, both are one and the same – that is, they invest in Nifty, which consist of the same set of 50 stocks. Ergo, the returns also have to be very similar, if not the same.

I was wrong.

Before I delve further, let me briefly introduce the concepts of Expense Ratio and Tracking Error.

Expense Ratio: Simply put, expense ratio is the cost associated with running a particular fund. It includes the management fee and operating expenses like the registrar and transfer agent fee, audit fee, custodian fee, marketing and distribution fee.  Usually, this cost is annualized and you would notice ‘Expense Ratio’ column somewhere way below in the Offer document. The NAV of each of the funds that we see in newspapers is after deducting this expense. Usually, expense ratios of equity funds are greater than debt funds.

Tracking Error: Simply put, Tracking error is the standard deviation of the returns differential between the fund and its benchmark. A fund that has a high tracking error is not expected to follow the benchmark closely and thereby might result in lower returns than the benchmark.

Coming back to our Nifty BeES vs Index funds argument, I present to you a table compiled by Ajay Shah (wonderful blog – must follow!) sometime back (slightly dated, July 2008. One Mint also compiled this data as recent as May 2010 and I don’t see much difference, do you?) –

 

Scheme Tracking error (%) Expenses (%)
Nifty BeES 0.19 0.5
Franklin India Index Fund – NSE Nifty Plan – Growth 0.42 1
Franklin India Index Tax Fund 0.58 1.5
UTI SUNDER 0.59 0.5
Tata Index Fund – Nifty Plan – Option A 0.63 1.5
UTI Nifty Fund – Growth 0.7 1.21
PRINCIPAL Index Fund – Growth 0.86 0.75
ICICI Prudential Index Fund 1.1 1.25
SBI Magnum Index Fund – Growth 1.26 1.5
Canara Robeco Nifty Index – Growth 1.45 ?
Birla Sun Life Index Fund – Growth 1.76 1.51
LIC MF Index Fund – Nifty Plan – Growth 1.99 1.5
HDFC Index Fund – Nifty Plan 2.55 1.5

 

We see that the index funds have a pretty significant tracking error compared to the Nifty BeES along with almost double (and sometimes triple) the expenses [double whammy – greater tracking error as well as more expenses!]

Based on the above data, it is pretty safe to conclude that if the objective is to mimic Nifty returns, your best bet would be to invest in Nifty BeES.

However, there is another nuance to this whole investing in Nifty BeES vs Index funds (and the point of this post – took too long, eh?). What about brokerage charges? Do they impact our returns? Especially when we SIP.

Mutual Funds have been forbidden (from August 2009, I think) to charge any entry loads on any of their funds. Almost all index funds do not have an entry load and have an exit load of 1% only if you exit the fund before 1 year of that investment. Technically, if you are a long term investor (say > 1 year) and are SIPing into an index fund, there is no expense other than the Expense ratio (which varies from 0.5%-1.5%).

SIPing into Nifty BeES however would involve brokerage charges. I use Sharekhan and they charge 0.25% on every purchase of Nifty BeES (or any other stock for that matter) and 0.25% on every sell. So, when you SIP, you are technically paying 0.25% every month, along with an expense ratio of 0.5% every year and 0.25% again when you sell.

How do the returns stand now? Let me illustrate with an example. We assume a simple scenario where there has been no growth in Nifty returns (or 15% growth. We assume there is zero tracking error). How would Nifty BeES vs Index funds stack up?

Period Nifty BeES Actual amount invested after brokerage of 0.25% Index funds Actual amount invested after entry load of 0%
1 10000 9975 10000 10000
2 10000 9975 10000 10000
3 10000 9975 10000 10000
4 10000 9975 10000 10000
5 10000 9975 10000 10000
6 10000 9975 10000 10000
7 10000 9975 10000 10000
8 10000 9975 10000 10000
9 10000 9975 10000 10000
10 10000 9975 10000 10000
11 10000 9975 10000 10000
12 10000 9975 10000 10000
         
Total Amount Invested   119700   120000
Expense ratio 0.50% 598.5 1% 1200
Brokerage on selling after 1 yr 0.25% 299.25 0% 0
Total returns   118802.25   118800
Difference in amount in returns between Nifty BeES and Index funds 2.25      

 

As you can see from the table, the difference is just Rs. 2.25/- on amount of Rs. 1,20,000. A miniscule percentage difference between investing in Nifty BeES and Index funds. Conclusion? The expense ratios of Index funds, although slightly larger is not directly comparable to the expense ratio of Nifty BeES.

However, Tracking error seems to be a huge problem and you see the difference in returns below for some funds which have been in the market for > 5 years (apart from tracking error, Index funds usually have 5% of their portfolio in cash to service redemptions and hence the returns might not exactly mimic Nifty and hence the difference in returns) -

Fund Name Launch Date Returns(%) Expense ratio (%)
Canara Robeco Nifty Index Oct-04 7.38 1
HDFC Index Nifty Jul-02 6.6 1
Nifty Benchmark ETS Dec-01 8.29 0.5

 

Therefore, investing in a Nifty ETF is much better (atleast for the additional 1-2% return) than any Index funds available in the market, even if you SIP it, brokerage costs included. I don’t see a reason why you need to invest in an Index fund.

A similar analysis can be done for Liquid BeES vs a Savings account –

 

Column1 Liquid BeES Savings A/C
Amount Invested 10000 10000
Avg. return over a 5 year period (from valueresearchonline.com) 5% 3.50%
Interest earned 500 350
Brokerage costs (buy and sell) 50 0
Total amount 10450 10350
Difference 100  

 

Investing in a Liquid BeES is much better than keeping your money idle in a Savings A/c (even after brokerage of buying and selling). Some brokerages don’t charge (Sharekhan does!) while you invest in Liquid BeES. Even better returns.

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  1. #1 by Manshu on January 17, 2011 - 7:50 PM

    Very good and thorough analysis, excellent job – congratulations on the great blog.

  2. #2 by Kiran on January 18, 2011 - 8:12 PM

    Hi Manshu!

    Welcome to my blog. Thank you for your kind words – your OneMint website is awesome! Am a frequent visitor.

  3. #3 by momentumsignal on January 21, 2011 - 7:28 PM

    Hi Kiran,

    Glad to see that you have done an analysis on expense ratios, which is very important for long term investors and about which no one knows anything ordinarily.

    Nifty Index has a dividend yield of is around a percent at present. Stock indices like Nifty do not consider the dividend income. Both kinds of these funds, normal index funds and index ETFs also receive the dividends. But Nifty Bees is the only fund which pays out the dividend. If you consider the dividend payout of Nifty Bees, the fund’s rate of return might be slightly higher than the other funds. Or in other words, in case of ordinary index funds, the dividend yield is offset by either expenses or by the tracking error.

    BTW, thanks for the link.

  4. #4 by Kiran on January 24, 2011 - 11:27 AM

    @momentumsignal – Thank you for your comments. I was struggling to find a write-up which included brokerage costs too, but couldn’t. I then thought to write it up myself :)

    Hmm…well, dividend payout in Nifty BeES vs dividend reinvested in index funds – would that really change the rate of return by 1%? I am not really sure. It’s probably safe to assume that the stated returns as a benchmark and start basing investing decisions from that.

    Btw, your blogpost was the one I came across which dealt with P/B and Div Yield in addition to P/E – so thanks for that. I first came across the entire analysis on equityguru.in, which is word-by-word copy from your momentumsignal blogpost. I am not sure whether you are the same person or someone else plagiarized it.

  5. #5 by Kulwinder Singh on January 28, 2011 - 11:35 PM

    What about the charges for maintaining a demat account especially if one has to invest in nifty Bees for long span of time lets say 15 years

  6. #6 by Kiran on January 29, 2011 - 7:46 PM

    @Kulwinder – Per year demat charges are approx Rs. 400/-. If I were to invest Rs. 10k (or Rs. 5k) per month in Nifty for an year, Rs. 400/Rs. 120000 would form a minor percentage.

    Secondly, you cannot associate demat charges to just Nifty ETF alone. You need to spread the cost across your investments through the brokerage (say, IPO/Stocks/Infra bonds etc). When you spread costs across these investments, the percentage cost associated with Nifty ETF would be even smaller.

  7. #7 by Kulwinder Singh on January 29, 2011 - 9:46 PM

    Point taken but why one would invest in nifty Bees or in index bonds if he knows how to select good stocks ,which IPO will make money for the investor and about infra bonds they are to cyclical in nature that its difficult for a average investor to time them and also infra bonds are too riskier a investment to be (its better to invest in diversified funds by taking less risk for same return)

  8. #8 by ClickInsurance.co.in on October 6, 2011 - 3:31 AM

    Great post considering the launch of IIFL Nifty ETF recently. The risk to be considered is however, The benchmark for IIFL Nifty ETF Fund is the S&P Nifty 50 Index. By investing in such a fund, you are taking the risk on overall Indian Markets, as included the 50 shares of Nifty 50. If the Nifty fluctuates, so will the returns generated from this fund will keep fluctuating in either direction. But overall, the index based index funds and ETF’s are learnt to have outperformed the rest of the mutual funds in better probability.

  9. #9 by piyush modi on October 6, 2011 - 5:49 AM

    @ comparison between ETF & Index fund. Awesome. Simple to understand.
    @ calculation of total returns between the two: over a one year period they might come out shoulder to shoulder, but just stretch it to 3 yrs and instantly you will start seeing the difference because, brokerage will be one time on each installment, while expense ratio will be for the entire duration, every year, for the entire corpus, not only from the initial amount, but also on the accrued gains.
    @ you know right that the above comment is a form of comment spam. the guy is just trying to get backlinks for his site, as well as traffic if any1 clicks it.

  10. #10 by Kiran on October 17, 2011 - 9:15 PM

    @piyush – thanks. keep visiting.

  11. #11 by Best credit card in India on November 15, 2011 - 1:59 AM

    Wonderful post Kiran! You understand the subject very well, but more importantly, you know how ot communicate it in a simple way! Kudos!

  12. #12 by parthi on April 1, 2012 - 3:14 AM

    pls tell…hw to find tracking error…

  13. #13 by anurag butoliya on May 27, 2012 - 6:36 PM

    I did the same analysis in a spreadsheet , however by doing the analysis for etf funds considering the equal number of stocks bought every month ( considering etf are bought on and sold on NSE , so taking equal amount every month say 1000 doesn’t make sense ) the returns for GS nifty BeES were actually 8.799 % and not 13 % as shown in moneycontrol website ( i did an analysis taking 10 yrs as investment horizon ) , the same analysis on franklin IIF and UTI index fund yielded around 11% return even after considering the taxes etc )

  14. #14 by p singh on September 27, 2012 - 4:02 AM

    nice comparison of etf and index funds. please suggest atleast 2 nifty index funds and 2 sensex index funds (not etf) having lowest expense ratio and lowest tracking error.

    could please reply at my email ?
    thanks.

  15. #15 by junkmails1981onkar on October 4, 2012 - 11:39 PM

    nice, do you know how is it taxed?

  16. #16 by abvblogger on May 26, 2013 - 1:28 AM

    hi guys, why doesn’t nifty bees reinvest the dividend? their trading costs are much lower than ours, and the total returns makes a big difference! at least 1.5% going by historical data from 1999 to 2013.

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  18. #18 by rajesh on September 21, 2013 - 11:34 PM

    hi guys..if one were to invest heavily in nifty bees..and goldman sachs goes belly up like lehman bros.. what happens ?

  19. #19 by rajesh on September 22, 2013 - 11:28 AM

    my full question..if goldman sachs goes belly up, what happens if one is holding huge qty nifty bees..since nifty bees is sold by goldman sachs.. like nsel crisis now ?

  20. #20 by Kurian on October 13, 2013 - 12:34 AM

    No body has answered Rajesh’s question. This is a very valid question. Anyone?

  21. #21 by rajesh on October 29, 2013 - 2:46 AM

    dear kurien.. nsel crisis..people invested in e silver, e gold in nsel..now they are stuck..suppose if one invests heavily nifty or junior nifty bees..is there a 100% guarantee for the principal amt ?

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  25. #25 by rajesh c on August 15, 2014 - 1:15 PM

    goldman sachs factsheet..shows that nifty bees has delivered 18% annualised returns..bank fd is about 10 %..no long term tax..now another idea..u get loans at 12 %..so borrow at 12..hope to earn 18..pocket the difference ?

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  27. #27 by rajesh c on August 17, 2014 - 5:58 PM

    nifty has given about 10% increase in eps year on year long term i would say..if wrong..do point out..so if one invests in nifty bees..he should get 10% returns..above 1 year no tax..that quite a saving…now another point..the volatility…if one buys using s.i.p. or value averaging method..this returns would increase…so considering tracking error or brokerage charges..the bigger picture gets lost…an additional bonus..nifty bees also gives divdend…any contra comments..

  28. #28 by rajesh c on August 17, 2014 - 6:03 PM

    goldman sachs shows 18% returns for nifty bees since inception because nifty bees was launched when nifty PE was on lower side…hence the earlier 18% returns that i inadvertently put..but growth in eps of nifty seems to be about 10% on long term..hope others throw more light on this…

    • #29 by abvblogger on August 17, 2014 - 6:15 PM

      Yes, that’s why the key is to enter at a low multiple. But don’t forget that if you exit the market, at a ‘high’ multiple, you’ll lose that much time of compounding while you’re out. That’s also the flaw with SIPs. In a steadily climbing market, you lose time in compounding. So the long-term return of NIFTY will probably be somewhere between 10-15%. Anything above that is quite improbable for a buy & hold.

      • #30 by rajesh c on August 17, 2014 - 8:33 PM

        dear abvblogger..my guess..if u exit at a high multiple ( bubble territory ) would be super coz u hav excedded the returns and would get back in at lower multiple ( as and when nifty follows euphoria with pessisim) ..not an easy task though..( but if nifty hits a 28 multiple like in 2000 and 2008, can we afford not to sell)regarding s.i.p..if one does not have bulk amounts to invest..he paces them out…so he does participate in the wealth train…as per his individual capacity..i agree that 10 to 15 % returns is reasoble fair enough for nifty over a long period..tax free..

        • #31 by abvblogger on August 17, 2014 - 10:13 PM

          I agree with you. The difficulty lies in knowing what is bubble and what isn’t. Regarding SIP, it is obviously the only way when you don’t have a lump sum. I meant that purposely delaying lump-sum investment has a downside. Also, while you’re right that 10% tax-free is not bad, the truth is that 10% is just 2% real return, net of inflation. So it really isn’t great. Whereas in developed countries equities return 6-8% which is a real return of 3-5%. So we have to hope earnings growth will be at least 12% or more.

          • #32 by rajesh c on August 17, 2014 - 10:28 PM

            dear abvblogger..while it is foolish to predict markets…historically..nifty at above 25 PE is bubble terittory..( data taken from nse site..which when compared with nifty chart )…yes..american markets ( s&p 500 ) have given historical 9 % returns with sumtimes zero inflation and zero interest rates..( an american can borrow money and bet on the s&p and make money in the long term ) indian indices hav given 12 % returns with high inflation and high interest rates..that shows how smart americans are ( in keeping dollar as world currency )..now for us in india…as u said 2 % real return is right…we can only improve on it..if we play on volatility..or perhaps..my knowledge is very limited..but are we having the wrong stocks in the index or are they weighted wrongly ?

  29. #33 by rajesh c on August 17, 2014 - 6:12 PM

    another point is that nifty is designed for long term upward growth..index constituents are re balanced every 6 months..losers thrown out..hopeful winners brought in…in a casino atmosphere..the biggies would always want wheel of fortune enticing gullible people..with an upward moving indice…so play along with them by buying the nifty or nifty bees…still better are actually the sectoral indices…which have given better returns..

  1. IIFL Nifty ETF Review

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