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Benchmark lines up six sector ETFs for launch

The fund house wants to offer the complete equity range to investors

Benchmark Mutual Fund has filed an offer document with the Securities and Exchange Board of India (SEBI) for the launch of six open-ended exchange traded funds (ETFs). All of the planned launches are sector-specific.

Benchmark has positioned itself as an index fund house. It already offers a Banking ETF, Gold ETF and PSU ETF. Now the fund house wants to offer the entire range. Explaining this sudden flood of new offers, Rajan Mehta, executive director, Benchmark Asset Management Company says: “We thought it appropriate to have the entire bouquet of ETFs listed at one go so that advisors and investors get to choose from the full spectrum.”

ETFs are passively managed funds that are similar to index funds except that they are listed on the stock exchanges. Sector-specific ETFs allow investors to take passive exposure to a particular sector at a lower cost than actively managed funds. Now investors, who are open to this form of investing, will be able to invest in virtually any sector within the market, an option unavailable previously.

The move, it appears, was prompted by demand for such sector-specific ETFs from brokers, wealth managers and managers of portfolio management schemes (PMS) who practise a top-down approach to investment. Says Mehta: “They wanted the flexibility to be overweight or underweight on certain sectors in their clients' portfolios without getting into stock selection. The introduction of such products will enable them to construct portfolios based on their views of various sectors. Moreover, ETFs are increasingly used by advisors and investors to implement their asset allocation decisions.”

Viewing it as a positive development, Veer Sardesai, a Pune-based financial planner says that “the launch of more ETFs is a welcome development since it provides investors the opportunity to participate in the stock markets at a lower cost compared to mutual funds.” Investors should note that the expense ratio of an ETF is much lower than that of an actively-managed mutual fund. Sardesai goes on to say that an ETF “also allows long-term investors to remain isolated from the costs of short-term trading in the fund by other investors.”

The launch of so many ETFs points to the asset management company's (AMC) confidence in the growing maturity of Indian investors. They are obviously of the view that investors now appreciate the advantages of investing via an index-based fund, and that passive investing might finally be coming of age in the country. While one wonders about this, Sardesai believes it holds true: “Investors are more financially savvy now and they understand that the odds of beating the market consistently year after year are stacked against the fund manager,” he says. Whether or not the Indian investor is looking for a low cost product and not willing to bet on the fund manager's prowess will determine the response to these funds.

Takeaways for investors
When you buy an ETF, your money gets invested in the same group of stocks that make up the index (and in the same proportion as their weights in the index). So don't expect to outperform the index as an actively diversified fund may do. On the other hand, neither will your investment tumble dramatically vis-à-vis the index.

What we do suggest is that if you have an appetite for risk, let your core holdings be actively managed diversified equity funds. For your sector exposure, opt for sector-based ETFs. But do ensure that such tactical allocations are not more than 20 per cent of your overall portfolio. It will be easy to track the weightage and adjust it accordingly since all ETFs are to be held in a demat form making buying and selling of units easier. But don't be too eager to churn rapidly or else you will end up paying short-term capital gains tax.

The new schemes
Scheme  Benchmark Index
IT BeES CNX IT Index
FMCG BeES CNX FMCG Index
Services BeES CNX Service Sector
Energy BeES CNX Energy Index
Pharma BeES CNX Pharma Index
Realty BeES CNX Realty Index
Around 95-100% of each of these funds’ assets will be allocated to securities constituting the index
Maximum 5% could be invested in money market instruments, government securities, bonds, debt instruments and cash at call
All schemes offer the growth option only