Transcript of the Podcast
Hi this is your editor Arjun Parthasarathy speaking. The Friday podcast is a value add feature for the followers of Investors are Idiots.com. The brief podcast will select one topic for analysis and will be released every Friday.
This week’s topic is on “ How to use Nifty Index ETFs”
ETFs or Exchange Traded Funds provide an inexpensive and seamless route to gain exposure to a particular asset class. In India ETFs are available for investments in equities and gold. In equities, Nifty and Sensex index ETFs have gained acceptance amongst investors. Nifty index ETFs are widely used by foreign institutional investors (FIIs) as Nifty index futures and options are well traded and provide a good hedge for ETF investments.
ETFs have many uses for you. You can use the Nifty index ETF (ETF) for staying invested in equities till such time you construct a portfolio of stocks or mutual funds. You can use the ETF to park proceeds from sale of stocks. You can use ETFs to gain exposure to equities as an asset class if you are a first time investor or if you are a risk averse investor. ETF is a good portfolio balancer and will provide the necessary cushion for an equity portfolio in uncertain times.
On the first point of using ETF to stay invested in equities till such time you construct a portfolio of stocks or mutual fund schemes. For example if you are planning to invest in equities but you are unsure on what stocks to buy or what mutual fund scheme to invest in, you can invest the money earmarked for equities in an ETF. Investing in the ETF will help you participate in market upswings even as you go about building a portfolio of stocks or mutual fund schemes. Hence if Nifty index rises 10% before you start investing in equities, the ETF investment will help take full advantage of the 10% rise in the index.
On the second point of using ETF to park the proceeds from sale of stocks. You are keen to book profits from a stock you have invested in as you are satisfied with the returns but you do not know what to do with the money as you have not identified another stock to buy. ETF will act as a stop gap investment for your stock sale proceeds, as it will help you stay exposed to the market to take advantage of any gains in the index. The ETF will help you book profits in the stock without you worrying about where to invest the profits.
On the third point of being a first time or a risk averse investor in equities, ETF is a good way to take exposure to equities without worrying about losing heavily. The index is made up of a bunch of stocks with most of the stock having strong fundamentals. Except in cases of extreme volatility, it is unlikely that you will lose most of your capital in an index ETF. However in case of single stocks or mutual fund schemes, losses can be pretty high if the wrong stock or scheme is selected for investment. ETF will provide more peace of mind for first time or risk averse equity investors.
On the last point of ETF being a good portfolio balancer. ETF will help you create a portfolio of stocks with a high risk return profile. For example if you want a portfolio comprising stocks that can potentially generate 100% returns but with 50% risk, the ETF can be used to balance out the risk. A portfolio with 50% invested in high risk stocks and 50% in ETF, a fall in the market will only result in a total loss of 32.5% if high risk stocks lose 50% in value and the ETF loses 15% in value. The proportion of high risk stocks to ETF can be varied depending on your risk preference.
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