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Exchange traded fund, a win-win option
Sangita Shah in Mumbai |
September 09, 2003
If an investor wants to have the cake and eat it too, the exchange traded fund could be the way out.
There are five ETFs in India at present, of which three are based on the 50-share S&P CNX Nifty index, one on the 200-share CNX Nifty Junior, and the third on the 30-share BSE Sensex.
How an ETF works
ETFs are open-ended exchange traded funds that are designed to track specific indices and trade just like any other stock, combined with the benefits of a mutual fund.
While ETFs are similar to index funds, they differ in some ways.
ETFs can be bought and sold over the exchange through a broker on a daily basis at real-time prices unlike traditional equity funds.
As they are traded on the exchange they can be bought / sold through any broker across the country thereby reaching out to a larger number of investors at the lowest possible cost.
ETFs are the latest and the fastest growing mutual fund structure in the world. Globally, since the introduction in the United States, in 1993, ETFs have grown rapidly with around $163 billion invested in over 291 indices (as on July 2003).
ETFs are different from conventional index funds in the sense that ETFs are traded throughout the day unlike index funds whose NAVs are computed.
While many investors have similar outlooks, no two are exactly alike. ETFs allow long-term investors to diversify their portfolio at one shot.
As ETFs are no load schemes and annual management fees are generally lower, it is an easy and cost efficient way to invest in a basket of securities.
It provides liquidity for those investors with a shorter-term horizon as they can trade intra-day at prices near to the net asset value.
Being real-time, it gives investors better control and flexibility to manage their investment. As the initial investment is low, investors find it simple and convenient to buy/sell.
India joined the ETF club in December 2001 with the launch India's first ETF 'Nifty BeES' (Nifty Benchmark Exchange-traded Scheme) by Benchmark Mutual Fund, based on the S&P CNX Nifty Index.
Since then Benchmark has launched the Junior BeES and the Liquid BeES.
Nifty BeES has appreciated 42.24 per cent on a monthly average to current price of Rs 138.16 till date from Rs 97.13 in April 2003.
While Junior BeES is based on the CNX Nifty Junior Index and has been the best performing fund in 2003, Liquid BeES is the world's first liquid ETF.
The star performer among all the ETFs has been CNX Nifty Junior Index which has appreciated a whooping 72.92 per cent during the period since April 2003 from Rs 132.53 to Rs 229.17 till date.
By their nature ETFs are passive funds. But as seen in case of Junior BeES, passive fund management does have a major role to play in the Indian markets.
Now the investors are turning smart and are resorting to arbitrage opportunities provided between the spot, future and the ETF.
On the other hand, investors got another opportunity in July, when SUNDER, approximately equal to 1/10th of the value of S&P CNX Nifty listed on the stock exchange.
The UTI AMC managed 'Sunder' shares are now embarking on a second round of fund mobilisation.
The NAV of Sunder is declared on a daily basis and the asset management company can also declare the dividend in the scheme.
Sunder is flexible and can also be used for arbitraging with cash and futures market.
The only ETF which trends the key Sensex is SPIcE, managed by Prudential-ICICI. It trades like any other equity share in the cash segment of a stock exchange.
The price of SPIcE is linked to the Sensex, which is approximately 1/100th of Sensex.
Initially, SPIcE units were created out of IPO (initial public offering) proceeds. Subsequently, SPIcE units are being created and redeemed on an on-going basis through a creation and redemption process between the authorized participants and the fund.
Authorized participants are generally large institutions/arbitrageurs/market makers/brokers who hold large chunks of Sensex stocks and exchange the same for SPIcE units.
Thus, the trading of SPIcE units on the stock exchanges for investors would be totally separate from the creation process.
In fact, we can say that SPIcE unites trade on two markets concurrently: primary and secondary markets. The pricing of SPIcE units is continuous during normal trading hours. Each SPIcE unit will trade at its net asset value, which is approximately 1/100th of Sensex.
For example, the price of SPIcE in April (monthly average) was 30.38 when the Sensex was 3036.66 and in September (average) it is Rs 43.75, when the Sensex is 4320.32, a rise of 44.01 per cent as against the appreciation of 42.29 per cent in the Sensex.
How to invest
You can buy an ETF just the way you buy a share -- from a stock exchange. You can also buy it from a mutual fund that manages such a scheme.