You have recently launched a fund of funds (FoF) which will invest in index funds. How is this different from directly investing in an index fund?The Index FoF will be investing only in our own funds, that is, the Exchange Traded Funds (ETFs). Since the ETFs are not available to retail investors through mutual fund distributors, we decided to come up with this FoF. It will help bridge the gap between us and the last mile contact, the mutual fund agents. Investing in the Nifty Benchmark Exchange Traded Scheme (Nifty BeES) is not much different from investing directly in the Nifty index. However, there is no other fund available on the Nifty Junior, or on top 100 stocks. Our FoF will be the only way to invest if someone wants an open-ended investment in these. What is an ETF?An Exchange Traded Fund is an open-ended fund that is listed on the stock exchange. It is priced on real-time rates throughout the trading day. Unlike a mutual fund unit, it can be bought or sold at any time during market hours. Besides, in an ETF the long-term investor does not subsidise the cost of a short-term investor. For example, if a short-term investor pulls out of a mutual fund, the fund’s net asset value (NAV) will drop. This cost has to be borne by those investors who are still invested. This is not the case in ETFs. Second, ETFs have very low costs. Our ETFs cost about 80 basis points. Finally, in ETFs you can’t do switching or market-timing. How can I buy an ETF?You can approach any NSE broker and tell him you want to buy NiftyBeES. It is listed on the capital market segment. The ticker is NiftyBeES. What is the annual cost of investing in the ETF, as well as in the FoFs?The cost of buying an ETF is 80 basis points. If you buy our FoF, you can add another 75 basis points. That comes to about 1.5 per cent annual cost. The recent volatility in the stock markets has shaken common investors. Why will they be attracted to the index at this point?We believe that increased volatility will drive investors to index funds. That’s because as compared to individual stocks and other diversified mutual funds, the volatility on the index is lower. We have already seen a mindset shift happening in the index futures. In the last three-four months, the volumes in index futures has been 40-50 per cent, and the rest in stock futures. Previously, index futures comprised only 30 per cent of the volume. Most mutual funds in the market have a pedigree, a well-known house like Tata or Birla or Templeton backing it. Where does Benchmark come from?We don’t think pedigree matters. Not having a pedigree is an advantage because we can do anything we like, in a transparent, efficient manner. We are professionals who have worked in companies like Merill Lynch, and have decided to set up this AMC. Niche Financial Services provided us the initial Rs 10 crore capital needed to set up the fund. Our bigger challenge is to convince people that indexing works. Junior BeES has given 172 per cent returns last year, making it the best performing mutual fund in 2003-04. That’s our pedigree. What is your outlook for the Indian stock markets?Our belief is that the equity markets will continue to give returns higher than any other asset class. Domestic companies are doing well, the US economy is looking up and outsourcing is here to stay. I’m personally very bullish on India and expect the markets to give returns of 12-15 per cent at least.
