Rama Krishna Vadlamudi November 6th, 2009

Junior Nifty Bees one-year return

120
100
80
Rs

60
40
20
0
11/5/2008

12/5/2008

1/5/2009

2/5/2009

3/5/2009

4/5/2009

5/5/2009

6/5/2009

7/5/2009

8/5/2009

9/5/2009

10/5/2009

11/5/2009
Source: NSE. Data as on November 5, 2009. In just 11 months, it jumped by 120%! It’s unbelievable, true.

THE BEST OF MY STUFF ON Reads

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TOTAL READS CROSSED 12,500!

Rama Krishna Vadlamudi, MUMBAI. www.scribd.com/vrk100 Nov. 6, 2009 Page 1 of 9

Please read author’s disclaimer at the end.
NIFTY JUNIOR BeES (Nifty Junior Benchmark Exchange Traded
Scheme) is a mutual fund product, but it is traded on NSE throughout
the trading day like any company’s share. It is an open-ended mutual
fund scheme. Like a share, one can buy/sell units of NIFTY JUNIOR
BeES on NSE (National Stock Exchange) throughout the trading hours.
JUNIOR NIFTY BeES is traded in demat form only. One can buy
JUNIOR NIFTY BeES from NSE through one’s broker and the units will
be credited to one’s demat account on T+2 basis. If one desires, one
can sell the units again through NSE anytime during the trading hours.

Junior Nifty Bees Daily Volumes

800.00

700.00

600.00

500.00
Rs lakhs

400.00

300.00

200.00

100.00

0.00
11/5/2008

12/5/2008

1/5/2009

2/5/2009

3/5/2009

4/5/2009

5/5/2009

6/5/2009

7/5/2009

8/5/2009

9/5/2009

10/5/2009

11/5/2009
Source: NSE. Data as on November 5, 2009. One-year volume chart.

What is an Exchange-Traded Fund?

Before we plunge right into Junior Nifty Bees, let us examine a little about ETFs-

An ETF is basically an index mutual fund scheme with a little
difference

The main difference between an index fund and an ETF is this: an ETF
is always listed and traded on an exchange; whereas an index fund
has to be bought/sold directly with the particular Mutual Fund
company or through a mutual fund agent/distributor

An ETF is linked to a benchmark index like any index fund

An ETF can be bought and sold through an exchange like any share

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To buy an ETF, one requires a demat account and a trading account
with a broker to buy/sell on the particular exchange where the ETF is
listed/traded; whereas for buying an index fund, investor does not
require a demat account and she can directly approach the mutual
fund for buying or selling the index fund units

What are the Components of CNX Junior Nifty?

Junior Nifty BeES ETF is based on CNX Nifty Junior Index of the NSE. There are 50
stocks in it. It can be said that they are the most liquid stocks after those 50 stocks that
are part of the benchmark S&P CXN Nifty of the NSE, Mumbai, India. NSE selects these
fifty stocks in CNX Nifty Junior based on market capitalization, volumes and liquidity.
The stocks that appear in Nifty Junior will never appear in Nifty and vice versa. Together
these 100 stocks in Nifty and Junior Nifty indices are said to be the most liquid stocks in
India. Of course, NSE constantly changes the composition removing inactive stocks
while including actively traded stocks in the index. And there are fair chances that Nifty
Junior stocks move up the chain and get included in the main Nifty index. The traded
value for the last six months of all Junior Nifty stocks is approximately 16% of the traded
value of all stocks on the NSE. Impact cost for CNX Nifty Junior for a portfolio size of
Rs.50 lakhs is 0.26 per cent.

Salient Features of Junior Nifty BeES

One unit of Junior NIFTY BeES is equal to one-hundredth of the value of

CNX Nifty Junior Index. On 5.11.09, Junior Nifty index had closed at
9,391; whereas, Junior NIFTY BeES was quoting at Rs 94.53 on day’s
closing on NSE. The small difference (technically called tracking error)
between the underlying Nifty Junior index and Junior NIFTY BeES is due
to the supply and demand factors of Junior NIFTY BeES on NSE. On
5.11.09, its day’s high was Rs 94.60 and day’s low was Rs 92.05. During
the trading hours, the price of Junior NIFTY BeES will fluctuate in tune
with the movement of Nifty Junior index.

If the NIFTY Junior Index goes up to 13,000 in the next six months, the
value of one unit of NIFTY BeES will go up to Rs 13 or if the Junior Nifty
Index retraces to 8,000, then the value of one unit of Junior NIFTY BeES
will be realigned to Rs 80 in tune with the movement of the market

The structure of Junior Nifty BeES is such that it does not hurt long-term
investors from the inflow and outflow of short-term investors. This is
because the Fund does not bear extra transaction cost when buying /
selling due to frequent subscriptions and redemptions.

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It is traded only on the NSE (face value Rs 1.25) & India’s first ETF based
on a mid-cap index (Nifty Junior index consists of mid-cap stocks)

It is managed by the AMC of Benchmark Mutual Fund, which is sponsored

by one Niche Financial Services Pvt. Ltd. The fund manager is Payal
Kaipunjal. This Mutual Fund maintains other ETFs also – like, Nifty BeES,
Liquid, Gold, Bank, Derivatives and others. The total average assets
under management by the Benchmark MF are Rs 1,470 crore as on 31st
of October, 2009.

Entry Load is NIL

Exit Load: With effect from August 01, 2009, Exit load (technically referred
as CDSC) (if any) of up to 1% of the redemption value charged to the unit
holder on redemption of units shall be retained by each of the Schemes in
a separate account and will be utilized for payment of commissions to
mutual fund advisors and to meet other marketing and selling expenses

It is open-ended mutual fund

For tax purposes, it’s considered as an equity-oriented mutual fund. Long-

term capital gains tax (for holdings of more than one year) is NIL. (This
may change if the Direct Taxes Code is implemented after 1.4.2009)

Short-term capital gains tax (for holdings of less than one year) is 15 per
cent, plus surcharge (if any) and 3% education cess (This too may
change if the Direct Taxes Code is implemented after 1.4.2009)

STT is applicable for buying/selling of units of Junior NIFTY BeES on NSE

As Junior NIFTY BeES is bought from NSE like any share, brokerage
needs to be paid by the investor for buy/sell transactions

Dividend distributed by AMC for Junior NIFTY BeES is exempted from
Dividend Distribution Tax (DDT). Dividend is not taxable in the hands of
individual resident Indian tax payers. Benchmark AMC declares dividends
on Junior NIFTY BeES, now and then. The latest dividend was Rs 1.25
per unit paid in July 2009.

NSE symbol: JUNIORBEES

JUNIOR NIFTY INDEX is calculated using the Free Float methodology
with effect from May 4, 2009

Assets under management as on 6.11.2009 for Junior NIFTY BeES: Rs
44.31 crore with a total of 47.37 lakh units of Junior NIFTY BeES being
issued to investors

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It is highly liquid from an individual investor’s point of view

It is a passively managed fund. Its underlying will be in proportion to the

weight of the constituents of Junior Nifty 50 index.

Total expense ratio of the fund is 1.00% and is reasonable

Tracking error of Junior NIFTY BeES is 0.68% annualized. Tracking error

is the difference between Junior NIFTY BeES and its benchmark index,
that is, CNX Nifty Junior Index. The tracking error occurs due to some
factors, like: a small component of cash in the fund, difference in weights
between the fund and the underlying index, etc. The tracking error of
0.68% is negligible from individual investor’s point of view.

Trading of JUNIOR NIFTY BeES has been going on since its inception on
NSE on March 6, 2003

All types of investors – whether retail or institutional – can invest

Junior Nifty BeES’ performance as on Nov. 5th, 2009

2009 (till
Fund/Index 2004 2005 2006 2007 2008
Nov 5, 09)
% % % % % %
Junior Nifty
Bees 27.29 25.22 28.63 75.12 -63.26 101.73

Benchmark* 30.76 24.43 27.31 77.01 -63.52 106.13

Sensex 13.08 42.33 46.70 47.15 -52.45 66.51

Source: ValueResearch
* Benchmark is NIFTY Junior INDEX
Returns are absolute

As can be seen from above, Junior Nifty BeES has given better returns
compared to Sensex in the years, 2004, 2007 and 2009; whereas, Sensex had
given superior returns in 2005 and 2006. In the year 2008, Sensex had fallen by
52.45 per cent while Junior Nifty BeES had fallen more by 63.26 per cent. This
indicates that the volatility in the Junior Nifty BeES is much higher compared to
Sensex which consists of blue-chip frontline stocks. Investors need to be aware
of this volatility aspect before making any investments.

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 What are the components of Junior Nifty BeES?

Market
Nifty BeES – Company Investment worth Rs 2 lakh Value (Rs
Top 10 Holdings weight % in Junior NIFTY BeES will be lakh_ of
represented by the following the stock
stocks (Top ten stocks)
1 Jaiprakash Industries 6.89 1 Jaiprakash Industries 0.14
2 IDFC Ltd 5.61 2 IDFC Ltd 0.11
3 Kotak Mahindra Bank 5.18 3 Kotak Mahindra Bank 0.10
4 Dr Reddy’s Labs 5.15 4 Dr Reddy’s Labs 0.10
5 Sesa God 4.24 5 Sesa God 0.08
6 JSW Steel 3.55 6 JSW Steel 0.07
7 Bank of Baroda 3.36 7 Bank of Baroda 0.07
8 Bank of India 3.21 8 Bank of India 0.06
9 Asian Paints 2.80 9 Asian Paints 0.06
10 HPCL 2.76 10 HPCL 0.05
Total top 10 holdings 42.75 Total top 10 holdings 0.85
Data is as on Sep 30, 2009 Source: Benchmark AMC

The data on the right side of the above table gives an idea about the top holdings of an investor who is holding NIFTY
th
BeES units worth Rs 2 lakhs on a given day, that is, Sep. 30 , 2009. By buying units worth Rs 2 lakh, you’re indirectly
holding Rs 0.14 lakh of JP Associates, Rs 0.11 lakh of IDFC, Rs 0.10 lakh of Kotak Mahindra Bank and so on.

What are the Tope five Sector Holdings?

Top five sectors

80
67.86
70
60
50
%

40 30.36
30
20 12.18 9.08 8.45 7.79
10
0
Financials Healthcare Diversified Services Metals Top 5 Sectors

Data Source: ValueResearch Data as on Aug. 31, 2009

Note: Financials-IDFC, Kotak Mahindra Bk, etc; Healthcare-Dr Reddy’s Labs, GSK Pharma, etc;
Diversified-JP Associates, etc; Services-Concor, Indian Hotels, etc; and Metals-Sesa Goa, JSW
Steel, etc

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As revealed in the above graph, thirty per cent of the index consists of financials,
like bank stocks and financial institutions, making it highly vulnerable to the price
movements of banking/FI stocks. While in a traditional diversified equity mutual
fund product, the individual fund manager has got the mandate to maintain a
balanced allocation to different sectors; here in Junior Nifty BeES, the fund
manager has to necessarily keep the money as per the allocation in Nifty Junior
Index which moves dynamically. Even diversified equity mutual funds traditionally
have exposure to the financial sector ranging from anywhere between 10 to 20
per cent due to the dominance of financial stocks in India.

Can we Buy or Sell units directly from the AMC?

An investor can buy or sell minimum 16,000 units of Junior Nifty BeES and in
multiples thereof directly with the Benchmark Mutual Fund. This route is usually
used by High Networth Individuals (HNIs) and institutions to buy this exchange-
trade product. It is very convenient for corporates also.

Minimum Lot Size : 16,000 units

Price : In exchange for a basket of Junior Nifty securities

and cash defined as “Creation Unit”

Eligibility : Authorised participant or large institutions

For more on this ‘Creation Unit’, HNIs and institutions can visit:

http://www.benchmarkfunds.com/creationUnit.pl?product=jb

What are the risks involved in owning the units?

It’s a high risk fund and the return also can be higher or lower depending on the
movement of the underlying index. Junior Nifty BeES is based on Nifty Junior
Index with mid-cap stock exposure. The experience in Indian markets suggests
that mid-cap stocks are highly prone to high volatility as compared to the
benchmark indices, Sensex & Nifty. Investors are to be aware of other risks, like:

1) MARKET RISK: The returns of this fund are linked to the movement of
stock markets in India in general. If the overall market turns adverse, then
the fund will give negative returns to investors.

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Please read author’s disclaimer at the end.
 2) LIQUIDITY RISK: If sufficient volumes are not available on the exchange for the
product, investors may not be able to buy new units/liquidate their holdings easily
in the market and as such this investment involves liquidity risk (for small
individual investors, this is not a problem at all)
3) TRACKING ERROR RISK: The fund may not be able to invest the entire corpus
in the same proportion as in the underlying S&P CNX Nifty Index due to certain
factors such as: expenses incurred by the fund, corporate actions, cash
balances, dividend payouts, changes in the underlying index and regulatory
policies.

My Opinion and Summary

Junior NIFTY BeES is a high-risk financial product (high-risk compared to blue-

chip/frontline stocks or leading indices, Sensex or Nifty). It provides higher
returns with ‘high’ risk. It is a very simple and easy to understand product. As the
risk is high, returns from Junior NIFTY BeES can be higher or lower unlike blue-
chip stocks which give reasonable returns while protecting the downside. As the
number of fund managers, mutual fund houses and number of schemes are
increasing by leaps and bounds every day, it would be difficult for fund managers
to outperform the indices (like, Nifty, Sensex, BSE-500) on a sustained basis in
the long-term. (The author does not have any solid data to back his opinion.)
Finding new stock ideas year after year is next to impossible in these times of
greater higher volatility and abounding global uncertainties.
As the NIFTY Junior BeES represents the country’s top fifty mid-cap companies
on NSE through the Junior Nifty index, it would be very easy and convenient for
individual investors to buy the stock market without bothering much about the
wild movements in the fortunes of individual company’s performance. However,
one needs to keep in mind one’s overall asset allocation, individual’s need for
liquidity and to have a broad outlook on market dynamics, prevailing sentiment,
country’s economic situation, global factors, corporate performance, regulatory
risks, political risks, etc. By investing through Junior NIFTY BeES, individual
investors will be relieved of the burden of poring over bulky annual reports,
opaque financial statements, analyzing quarterly/periodical results minutely and
scratching one’s head over declarations of bonus shares, dividends, rights
issues, open offers, stock splits, etc. It is a good start with 15 or 25 per cent
allocation for ETFs in one’s equity portfolio for individual investors who like
passive investments.
Junior NIFTY BeES is a very convenient financial product compared to other
index funds* that are available to investors. (*These index funds can only be
bought directly from mutual fund houses and not through stock exchanges; and
these index funds have unreasonable tracking errors which may dilute the overall
returns in the medium/long term. The situation may change when SEBI
introduces a new trading platform for MF trading irrespective of fund houses)

Rama Krishna Vadlamudi, MUMBAI. www.scribd.com/vrk100 Nov. 6, 2009 Page 8 of 9

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 WHY IS MARKET TIMING RISKY?
One of the risks of market timing is being out of the
market when it has a big upward move. Consider the
period from May 26, 1970, to April 29, 1994. Suppose
out market-timer was in cash instead of for only the
best five days in the market out of that 14-year period
of 3,500 trading days. He might have doubled his
money (before taxes) in that 14-year period. But, had
he remained invested though out this period ignoring
the wild movements in stock indices, his buy-and-hold
strategy would have tripled his money. Now, do you
agree why market timing is a risky strategy?

-- From Peter L. Bernstein’s “Against The Gods: The

Remarkable Story of Risk:
PS: It’s really a remarkable book for people with a mathematical and statistical mind

Another ETF that is traded on NSE is NIFTY BeES, which is a low-risk product.
To know more about the author’s article dated Sep. 30th, 2009; just click:

http://www.scribd.com/full/20422760?access_key=key-3ngaf0kjt35a9njgca2
OR
http://groups.google.co.in/group/random-thoughts-on-investments/files?hl=en&&sort=date

Reference: For further information, please visit: www.nseindia.com, www.benchmarkfunds.com,

www.valueresearchonline.com and www.vanguard.com. The above analysis is made keeping in
mind the needs of individual investors. Mutual fund performance is subject to market risk and as
such investors should do their own due diligence before start trading in NIFTY Junior BeES.

AUTHOR’s DISCLAIMER: This should not be construed as a recommendation by me. The author holds Junior Nifty BeES units
in small quantity and as such it’s safe to assume that the author has a vested interest in the its price and general market going up.
The views of the author are personal. Mutual Fund performance is subject to market risk and as such investors should do their
own due diligence. Readers or investors must consult their certified financial advisor before taking any decision on their equity
investments and the investment should be in line with their risk profile & risk appetite and their general market perception. Any
equity investment should be within their overall ASSET ALLOCATION, which is extremely vital.

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Please read author’s disclaimer at the end.