In the domestic context, despite having been in existence for a while, Exchange Traded Funds have never quite captured the investor's imagination. This is in contrast to the scenario in markets like the U.S. where ETFs are quite popular. ETFs do have a bit of a history in India.
For example, we had a close-ended fund i.e. Morgan Stanley Growth Fund (launched in 1994) which was listed and traded on the stock exchanges. Year 2001 saw the launch of India's first open-ended, passively-managed ETF, Nifty Benchmark Exchange Traded Scheme (Nifty BeES).
Since then several ETFs of different varieties have been introduced. In this article, we discuss the investment proposition offered by ETFs and how they differ from conventional mutual funds.
What are ETFs? Simply put, an ETF is a basket of securities that is traded on the stock exchange, akin to a stock. So, unlike conventional mutual funds, ETFs are listed on a recognised stock exchange. Their units can be bought and sold directly on the exchange, through a stockbroker during the trading hours.
ETFs can be either close-ended or open-ended. Open-ended ETFs can issue fresh units to investors even post the new fund offer stage, although this tends to happen selectively on account of the substantial lot sizes involved. In case of ETFs, since the buying and selling is largely done over the stock exchange, there is minimal interaction between investors and the fund house.
Besides, ETFs can be either actively or passively managed. In an actively-managed ETF, the objective is to outperform the benchmark index. To that end, they have no obligation to invest in stocks from any benchmark index. On the contrary, a passively-managed ETF attempts to replicate the performance of a designated benchmark index.
Hence it invests in the same stocks, which comprise its benchmark index and in the same weightage. For example, Nifty BeES is a passively managed ETF with the S&P CNX Nifty being its designated benchmark index. In the Indian context, passively managed ETFs are more prominent.
