Nifty BeES – the only equity investment you would need

Yesterday I explained enough about the equities market to help understand the basics. Now in this post I will tell about a single Scrip that you can invest which has low risk and can return gains equal market gains. Indian equities market has given an average annual growth of about 16% over the long term. Imagine a stock which will give you 16% annual returns if invested over 30 years.

If you don’t want to understand anything and don’t want to think about your equity investment, just remember this one sentence. It will work for 95% of people.

Buy N shares of NIFTYBEES every month.

Thats it. Simple right? For example, If you have a surplus of Rs.10,000 every month that you want to invest in equities – close your eyes and instruct your broker to buy Nifty BeES for the Rs.10,000. At today’s rate (Rs. 576) you would get about 17 shares of Nifty BeES. Investing every month, you would have a few hundred shares of it in a few years, which would continue to grow as long as you stay invested.

Now for the longer explanation.

What is Nifty BeES?

Nifty BeES is an ETF (Exchange Traded Fund) by Goldman Sachs, which tracks the Nifty Index. To explain in simpler terms, Goldman Sachs has a computer program which takes your money and uses it to buy the equivalent number of all 50 stocks that the component of Nifty Index. Each single share of Nifty BeES is priced at 1/10th of the Nifty Index.

If Nifty is at 5700, the price of Nifty BeES would be (about) Rs.570. So if you buy 1 stock of Nifty BeES, the ETF would have invested in all of the 50 shares in Nifty. But you can say one can’t buy all of the stocks with just Rs.570. Right, but when lakhs of people buy it, the fund can buy enough stocks and your returns will be weighted according to your investment.

Why not buy specific company’s stocks?

You might be very interested in investing in specific company’s stocks because thats what everyone does and the people on TV are so experienced and say that they have 100% strike rate in picking winning stocks.

Do they really? No. This is a common problem when it involved finance matter (just like in astrology). They don’t talk about predictions that failed. Instead they make you focus on how their choice of one particular stock earned them 60% returns. They don’t talk about the 10 other stocks which made investors lose more money than they earned in that 1 winning stock. People are easily affected by “confirmation bias” and it greatly affect their investments.

Remember no one can select winning stocks every time. And you won’t know in advance which prediction would work out and which wouldn’t. If you invest in all the predictions they make, you would end up making more loss than profits.

How about mutual funds?

Mutual funds are managed by humans who check the fundamentals of a company and try to guess when to invest in a company and when to exit it. But like I said they are no better than the financial experts you see on TV.

Add a small fee that you need to pay the fund manager to handle your money, called “Expense ratio”. You would end up losing money before even making a bit of profit. All this for just some mediocre stocks picked by some human.

How is Nifty BeES different?

Nifty BeES is an index fund – your value of the investment would increase if Nifty increases, and it would fall if Nifty decreases. The value of Nifty is closely tied to how the Indian economy performs. If all the industries are doing well, nifty would definitely increase.

Whenever a company is removed from the index and a new company is added to the index, the ETF automatically makes the adjustment in the investment. It is exactly as if you are investing in these 50 front line companies. When invested in the long term you would definitely have increased your investment multiple times.

How is it less risky than buying a company’s stocks?

It is definitely less risky than buying a separate company’s stocks. Because you are investing in 50 stocks spread over about 22 sectors. How much more diversification do you need? Even if one particular sector is not performing well, say metals/sugar, there would be other sectors which would be performing well, like IT industries because of higher dollar price. Your investment would grow even if a few sectors underperform. Incase of a total bear market, your investment wouldn’t fall as badly as investing in a few companies.

Why not buy these 50 companies individually?

You can buy all the 50 constituents of the Nifty Index individually and get the same effect. But the advantage of buying Nifty BeES instead is you can invest a very small amount every month and it would grow at the same rate as Nifty. To buy even a single share of all Nifty companies you would be needing a much higher investment.

Managing the weightage of the different companies and reshuffling the portfolio whenever a company is taken out of the index and a new one is inserted, would be a headache. Which is easier, tracking 50 companies in your portfolio daily or tracking a single ETF once a month, just for 5 minutes to see how much profit you earned? Thats why the ETF has computer programs which do this automatically. And since it doesn’t have any human to make any decisions, you are protected from someone’s mistakes.

How do you buy it?

Buying Nifty BeES is very similar to buying a company’s stocks. Ask your broker or goto your online trading website and search for the scrip “NIFTYBEES” and buy the required quantity. Some brokers even have an option to invest a fixed amount or buy a fixed number of shares every month, called Monthly SIP (Systematic Investment Plan).

If your broker has that option, choose that and automatically every month your money is invested in Nifty BeES and you don’t have to even think about it. When you retire 30 years later, you would be sitting on a nice, fat load of profits than any of your friends. And the best part is, you wouldn’t have to pay a single rupee as taxes for any of this profit you earn (after 1 year of investment).

Just trust me on this and invest in Nifty BeES regularly. This is more than enough for 95% of a common man’s investment needs. Especially for beginner, start with Nifty BeES for 3 years and see the difference it makes vs your friends who invested in some new company.