Indian investors will soon be able to trade in two of the most popular global indices from the comfort of a familiar bourse: NSE, or National Stock Exchange. The exchange has joined hands with Chicago Mercantile Exchange to offer futures trading on S&P 500 and Dow Jones Industrial Average. These indices have some of the most valuable corporations such as Coca-Cola, GE, Wal-Mart, P&G and JPMorgan.
What is on offer: Investors would be able to take a position on the indices only (and not on individual stocks) by buying a futures contract of either (or both) S&P 500 or the Dow Jones Industrial Average. This is as simple as buying a futures contract of Nifty-50.
Why opt for global indices: Both are closely-watched benchmark indices world over. The Dow Jones 30-stocks index is the second-oldest US market index while S&P is more broad-based tracking 50 large cap US stocks (the market cap of S&P is close to a staggering $10,000 billion).
How to trade: Investors have to take a forward position (bullish or bearish) in an index just the way they do in Nifty-50 with contracts ranging from a month to three months. The exchange is still in the process of finalising contract details.
What is the currency risk: These two new indices will be rupee-denominated and settled only in cash. They do not pose any currency risk. In fact, the Reserve Bank of India (RBI) permits overseas investments up to $200,000 a year, but there is a currency risk which makes the investment riskier.
What is the investment risk: There is not much research available on individual stocks that make up the S&P and Dow Jone indices. It would also be difficult for Indian investors to take a call on the global macroeconomic variables driving these indices. This is, however, a good opportunity for sophisticated investors such as Life Insurance Corporation (LIC) or large mutual funds and high networth individuals (HNIs) who want to diversify their investment basket.