Benchmark Junior Exchange Traded Fund: Invest

Looking for a high-risk, high-return portfolio that is sure to rebound when the stock market recovers? The basket of stocks making up the Junior Nifty index seems to be your best bet.

You can acquire this basket by simply buying units of the Nifty Junior Benchmark Exchange Traded Fund (Junior BEES), which tracks the Junior Nifty index. We offer three reasons to buy this ETF:

More resilient

Made up of stocks that are neither slow moving large-caps nor untested mid-caps, the Junior Nifty portfolio offers a good balance between growth and quality.

As the Junior Nifty is supposed to be an ‘incubator' for the Nifty, it doesn't feature companies with a very low market cap that suffer from poor liquidity or high impact cost (the tendency of the price to swing if big deals are put through in the stock). Both are usually risks with mid or small-cap stocks.

Currently, the stocks in the Junior Nifty carry an average market capitalisation of about Rs 14,400 crore.

Stocks in the CNX Midcap basket in contrast, average only half this market capitalisation (Rs 7,100 crore). They are also much larger in terms of sales and profits and may withstand risks such as rising input costs and interest rates better.

The Junior Nifty is heavily tilted towards banks, financial services, pharmaceuticals and capital goods, sectors likely to benefit from secular growth in the Indian economy over the long term.

These sectors offer a good buying opportunity today, as they have borne the brunt of the recent market fall.

Between November 2010 and now, the Junior Nifty BEES has seen its unit price fall by 22 per cent. Its price-earnings multiple (PE) has dropped from 21 times trailing 12-month earnings to just 15.

The Junior Nifty is today available at a discount to the CNX Midcap index (PE of 16.5). It obviously carries a sizeable discount to the Nifty (PE of 21).

High-beta

The Junior Nifty has always been one of the indices to make the best of bull markets (while also suffering the worst damage in a meltdown). The index' 124 per cent return in 2009, as the markets rebounded from a trough, was the highest among the various indices (Nifty returns 71 per cent, Midcap index 95 per cent). The index's three-year return at 12.2 per cent is well ahead of the Nifty (6.5 per cent) as well as the Midcap index (7 per cent).

Investors in the Junior Nifty BEES must however watch out for the following.

One, this ETFs value can drop like a stone during a market decline. Remember that it lost 64 per cent in the 2008 fall. It is therefore, not for risk averse investors.

Two, market prices of ETFs can diverge quite a bit from their underlying NAV. Therefore, check the underlying NAV of the fund before you punch in the price, while buying units through the stock exchange.

Three, given the high-beta nature of this ETF, a five-year plus holding period is a must to give the investment time to recoup any losses from a market fall.

A unit of Junior BEES traded at Rs 105 on March 18.

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