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The National Stock Exchange (NSE) will launch interest rate futures on the 91-day treasury bills from July 4. So, what is this interest rate futures is all about? Interest rate futures (IRF) is a standardised interest rate derivative contract traded on a stock exchange to buy or sell an interest bearing instrument at a specified future date, at a price determined at the time of the contract.

Why are they issued?

These Money market instruments are issued to finance the short term requirements of the Government of India and they are issued at a discount to face value (Rs 100). The return is the difference between the par value and issue price There are different types of T-bills based on the maturity period like 91 days, 182 days and 364 days. Such instruments are very helpful for banks and mutual funds to hedge their exposure.

How are they quoted?

Quote Price = 100 minus futures discount yield.
E.g. For a futures discount yield of 7% p.a, the quote price would be 100 – 7 = Rs 93.00.

How are they settled?

The interest rate futures would be cash settled. In case of the 91-day treasury bill, the final settlement price of the futures contract is based on the weighted average price/ yield obtained in the weekly auction of the 91-day treasury bills on the date of expiry of the contract.

Advantages?

There is no Securities Transaction Tax (STT) and lower margins as compared to other forms of trading. This gives an easier and cheaper access to interest rates trading.

To put it in a nutshell, the interest rate futures can be used to take a directional call on the interest rates or for hedging their existing position. One can enter into an 91 DTB futures contract based on your interest rates view. If your anticipation is rise in interest rates you can create a short position in interest rates futures and vice-versa.

In continuation of earlier article about the basics of Exchange Traded Funds (ETFs) and pros and cons of investing in ETFs, let us look at the list of ETFs available in India. With regard to Equity ETFs, there are a few Index funds, couple of banking sector funds and an international index like Hangseng Bees.

Similarly in the Commodity ETFs,there are a quite a number of Gold ETFs, which has attracted a large number of investors, of late. Interestingly there aren't any Silver ETFs and one can expect such an ETF soon.

The following is the list of ETFs available in India and traded in National Stock Exchange of India. The list shows the Fund house, name of the scheme and the NSE symbol.


Equity ETFs:

Benchmark Mutual Fund:
Banking Index Benchmark Exchange Traded Scheme - Bankbees .
Hang Seng Benchmark Exchange Traded Scheme Hangsangbees.
Infrastructure Benchmark Exchange Traded Scheme -Infrabees.
Nifty Benchmark Exchange Traded Scheme- Niftybees.
Nifty Junior Benchmark Exchange Traded Scheme Juniorbees.
Psu Bank Benchmark Exchange Traded Scheme - Psubnkbees.
Shariah Index- Shariabees.

ICICI Prudential Mutual Fund - Sensex Fund -Spice.
Kotak Mahindra Mutual Fund:
Kotak Nifty ETF - Kotaknifty.
Kotak PSU Bank ETF - Kotakpsubk.
Kotak Sensex ETF.

Motilal Oswal Mutual Fund:
Most Shares - M100.
Most Shares - M50.
Most Shares NASDAQ-100 - N100.
Quantum Mutual Fund Quantum Index Fund -Qnifty.
Reliance Mutual Fund - Reliance Banking Exchange Traded Fund - Relbank.

Gold ETFs:

Axis Mutual Fund - Axis Gold ETF - Axisgold.
Benchmark Mutual Fund - Gold Benchmark Exchange Traded Scheme - Goldbees.
Birla Sun Life Mutual Fund - Birla Sun Life Gold ETF - Bslgoldetf.
HDFC Mutual Fund - HDFC Gold Exchange Traded Fund - Hdfcmfgetf.
ICICI Prudential Mutual Fund -ICICI Prudential Gold Exchange Traded Fund - Ipgetf.
Kotak Mahindra Mutual Fund - KOTAK Gold Etf- Kotakgold.

Quantum Mutual Fund - Quantum Gold Fund - Qgold.
Reliance Mutual Fund - Reliance Gold Exchange Traded Fund - Relgold.
Religare Mutual Fund - Religare Gold Exchange Traded Fund - Religarego.
SBI Mutual Fund - SBI Gold Exchange Traded Fund - Sbigets.
UTI Mutual Fund - UTI Gold Exchange Traded Fund - Goldshare.

Invest wisely !

In this second part of the series about Exchange Traded Funds (ETFs), we look at the advantages and disadvantages of ETFs. As we have seen earlier in Part 1 , ETFs trade like shares while providing the diversification of managed funds.

Though they are similar to mutual funds, they differ in their diversification like index, commodities and different sectors. Their performance closely tracks the investment returns of the shares making up the index or the commodity they are invested into.


Benefits of investing in ETFs:

1. ETFs are passively managed, have low distribution costs and minimal administrative charges. Hence most ETFs have lower expense ratios than conventional Mutual Funds.
2. Not dependent on the fund manager, the ETF just tracks the index.
3. Like an index fund, they are very transparent.
4.Convenient to buy and sell as it can be bought/sold on the stock exchange at any time of the day when the market is open.
5.One can short sell an ETF or buy even purchase one unit, which is not possible with index-funds/conventional Mutual Funds.

Currently, Inflation is the buzz word and let us take a look how inflation affects stocks markets and stock prices. To put it in simple words, Inflation is - your money loses purchasing power and as a result you buy less with the money you have than before. When the inflation rates start to rise, investors get very nervous anticipating the potentially negative consequences.

Many industries wait for the response of the Central Bankers or the Reserve Bank of India (RBI)  for their measures combating inflation. One of the measures is to increase interest rates, which the RBI is currently doing in its monetary policy.

However, the rising prices and the higher interest rates don't lead to positive effects on the investment portfolios of investors. When the interest rates are increased it becomes more expensive for the companies to borrow money and their borrowing costs is increased, and expansion plans are slowed down.

Since the revenues and earnings of companies tend to rise at the same pace as inflation, stocks can provide protection to inflation to a significant extent, but only when rising prices can be transferred to consumers. However, if the rising prices are transferred to the consumers this may lead to loss of market share due to competitiveness of companies.

Inflation has another negative impact, namely the prices rise but no additional value is added.  Since revenues and earnings of companies rise at the same pace as inflation, their financials are overstated, since no additional value is created. However, when the inflation starts to fall to its normal levels, the overstated earnings and revenues will decline as well. These ups and downs lead to blurring the actual state of value. Hence, we can say that lesser the firm is able to pass the inflation to its consumers lesser is its value and the more it can pass inflation higher is its value.

To conclude, the companies cannot pass whole inflation to consumers due to increase in competition and With the increase in inflation, cost of borrowing is generally increased due to increase in interest rates. As a result companies have to slowdown their expansion plans and their growth is reduced which reduces their valuation. Hence stocks provide a hedge against inflation, only when the company can pass that inflation to the consumers, which inturn would reflect in their earnings.

An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks,commodities and bonds. Most ETFs track an index, such as the S&P 500 or NIFTY. They first came into existence in the USA in 1993. It took several years for them to attract public interest. Over the last few years more than $120 billion is invested in about 230 ETFs. About 60% of trading volumes on the American Stock Exchange are from ETFs.

The most popular ETFs are QQQs (Cubes) based on the Nasdaq-100 Index, SPDRs (Spiders) based on the S&P 500 Index, iSHARES based on MSCI Indices and TRAHK (Tracks) based on the Hang Seng Index. In India , Nifty Bees is the first index fund which tracks the S&P CNX Nifty.

Let us take a look at  different types of ETFs.

Index ETFs : Most ETFs are index funds that hold securities and attempt to replicate the performance of a stock market index. An index fund seeks to track the performance of an index by holding in its portfolio either the contents of the index or a representative sample of the securities in the index.

Commodity ETFs : Commodity ETFs invest in commodities, such as precious metals and futures. Among the first commodity ETFs were gold exchange-traded funds, which have been offered in a number of countries.

Bond ETFs : Exchange-traded funds that invest in bonds are known as bond ETFs.

Currency ETFs : These funds are total return products where the investor gets access to the FX spot change, local institutional interest rates and a collateral yield.

While similar to an index mutual fund, ETFs differ from mutual funds in significant ways, because of their low costs, tax efficiency, and stock-like features. To know more about ETFs,  watch out for the Part 2, in which we discuss about advantages and disadvantages of investing in ETFs and details about various ETFs available in India...stay tuned !

When it comes to investing in stock markets, an investor is exposed to two kinds of risks - systematic risk and unsystematic risk. Systematic risk is due to macroeconomic movements and it affects the whole market, while unsystematic risks are company specific risks.

When we buy a stock of a single company we are exposed to both systematic risks (market risk) and unsystematic risks( company risk. But when we buy a diversified mutual fund or a portfolio we are exposed only to systematic risks and there is no unsystematic risks due to proper diversification by the mutual funds.

Let us take a look at some of the major advantages of mutual fund over stocks :

A mutual fund gives diversification :

If you have only 1,000 to 5,000 to invest, the money will not buy many shares of a single stock, and it will certainly not buy many different stocks. By putting your money in only two or three stocks, you are exposed to the possibility that one of them will plummet in price, wiping out much of your invested capital.

Instead, when you put your 1,000 or 5,000 in a mutual fund, your money buys into a portfolio that may comprise of 50 or 100 different stocks. If one or two stocks in the portfolio get hit hard, your losses will be much more limited because many of the other stocks will probably be going up at the same time.

A professional skilled manager chooses stocks for you :

Managers of stock mutual funds have instant access to information about every stock around the world at the push of a few computer keys. They work in companies where teams of research analysts who study corporate annual reports and these analysts visit company executives and factories to evaluate the firms’ prospects first hand. But individual investors have limited access to such information, like these fund managers.

The only disadvantage in investing in a mutual funds is that you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected.

Anyway. buying a mutual fund can substantially reduce our long-term market risk and result in a higher net return if they are used for longer term horizons and they take all the worries which are associated with managing stocks and provide proper diversification. In general that mutual funds are always better than individual stocks, since they involve lower risks, less money and but safe returns, as we have seen in HDFC Top 200 .