All you need to know about ETFs
Aug 16, 2008

Author: PersonalFN Content & Research Team

Thanks to the launch of a number of gold ETFs (exchange traded funds) in the recent past, ETFs as investment avenues have gained a fair bit of popularity as well. Increasingly, ETFs are finding themselves on the investor’s ‘to invest’ list. Having said that, ETFs still have a lot of catching up to do, before they can compete with conventional mutual funds, in terms of popularity among investors. One of the primary reasons for this is lack of knowledge and objective understanding about ETFs among investors. In this article, we present a primer on ETFs and discuss their investment proposition.

What are ETFs?
ETFs are a basket of securities that are listed and traded on a recognised stock exchange. Simply put, they are mutual funds, whose units can be bought and sold on the stock exchange. ETFs can be either passively managed or actively managed.

A passively managed ETF attempts to replicate the performance of its underlying benchmark index (like the S&P CNX Nifty, for instance). It invests in the same stocks as the index and in the same weightage as well. The intention is to track the index as closely as possible (i.e. with least deviation).

On the contrary, an actively managed ETF can freely invest in stocks/securities, within the guidelines laid down by its investment mandate. In other words, the fund has no obligation to invest in the same stocks/securities as its benchmark index. The intention is to outperform the benchmark index.

However, it must be noted that the defining feature of ETFs is not whether they are passively or actively managed, but that they are traded on the stock exchange.

ETFs in India
ETFs first made their presence felt in India in the year 1994 with the launch of Morgan Stanley Growth Fund, a close-ended, actively managed, diversified equity fund. However, the dismal track record of the fund combined with a price history that was trading perpetually at discount to the NAV, gave investors the wrong signal as far as ETFs were concerned. Investors began perceiving ETFs as poorly managed and felt short-changed when they sold their units at a steep discount to the NAV.

Things changed after the launch of Nifty Benchmark Exchange Traded Scheme-Nifty BeES (launched in December 2001), an open-ended, passively managed fund. It would be fair to say that the fund set the records straight for ETFs in the country. Since then, the ETF segment has grown slowly but steadily. Recently, the launch of gold ETFs has provided the much needed zing to the segment, thus attracting many investors.

ETFs at present have a fair variety to offer. For example, among others, there are ETFs like Quantum Index Fund and ICICI SPIcE Fund that track broad indices such as the S&P CNX Nifty and the BSE Sensex respectively. Then there is Bank BeES (from Benchmark Mutual Fund), an ETF that tracks CNX Bank Index. On the debt side, there is Liquid BeES that invests in a basket of call money, short-term government securities and money market instruments. And there are several gold ETFs to choose from. Going forward, investors can only expect the bouquet of ETF offerings to grow.

Thanks to the launch of a number of gold ETFs (exchange traded funds) in the recent past, ETFs as investment avenues have gained a fair bit of popularity as well. Increasingly, ETFs are finding themselves on the investor’s ‘to invest’ list. Having said that, ETFs still have a lot of catching up to do, before they can compete with conventional mutual funds, in terms of popularity among investors. One of the primary reasons for this is lack of knowledge and objective understanding about ETFs among investors. In this article, we present a primer on ETFs and discuss their investment proposition.

What are ETFs?
ETFs are a basket of securities that are listed and traded on a recognised stock exchange. Simply put, they are mutual funds, whose units can be bought and sold on the stock exchange. ETFs can be either passively managed or actively managed.

A passively managed ETF attempts to replicate the performance of its underlying benchmark index (like the S&P CNX Nifty, for instance). It invests in the same stocks as the index and in the same weightage as well. The intention is to track the index as closely as possible (i.e. with least deviation).

On the contrary, an actively managed ETF can freely invest in stocks/securities, within the guidelines laid down by its investment mandate. In other words, the fund has no obligation to invest in the same stocks/securities as its benchmark index. The intention is to outperform the benchmark index.

However, it must be noted that the defining feature of ETFs is not whether they are passively or actively managed, but that they are traded on the stock exchange.

ETFs in India
ETFs first made their presence felt in India in the year 1994 with the launch of Morgan Stanley Growth Fund, a close-ended, actively managed, diversified equity fund. However, the dismal track record of the fund combined with a price history that was trading perpetually at discount to the NAV, gave investors the wrong signal as far as ETFs were concerned. Investors began perceiving ETFs as poorly managed and felt short-changed when they sold their units at a steep discount to the NAV.

Things changed after the launch of Nifty Benchmark Exchange Traded Scheme-Nifty BeES (launched in December 2001), an open-ended, passively managed fund. It would be fair to say that the fund set the records straight for ETFs in the country. Since then, the ETF segment has grown slowly but steadily. Recently, the launch of gold ETFs has provided the much needed zing to the segment, thus attracting many investors.

ETFs at present have a fair variety to offer. For example, among others, there are ETFs like Quantum Index Fund and ICICI SPIcE Fund that track broad indices such as the S&P CNX Nifty and the BSE Sensex respectively. Then there is Bank BeES (from Benchmark Mutual Fund), an ETF that tracks CNX Bank Index. On the debt side, there is Liquid BeES that invests in a basket of call money, short-term government securities and money market instruments. And there are several gold ETFs to choose from. Going forward, investors can only expect the bouquet of ETF offerings to grow.



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Jun 16, 2014

The article is either incomplete or the pasting has gone haywire.

Please rectify this.
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