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Exchange Traded Funds

Topics Covered:

Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

 

Exchange Traded Funds

 

What to study?

For Prelims and Mains: What are ETFs, benefits and significance?

 

Context: The centre is planning to launch India’s first fixed income Exchange Traded Fund (ETF) comprising debt securities of large central public sector enterprises (PSUs).

 

Features and significance:

  1. The ETF is expected to have a size of Rs 15,000 crore to Rs 20,000 crore.
  2. The fund will comprise only AAA-rated papers of the PSU companies.
  3. It provides a new option to conservative investors to own securities of government-owned companies along with the facility of overnight liquidity as ETF units will be listed on exchanges.
  4. Compared with bank fixed deposits that generate a post-tax return of around 5.5 per cent, this product could generate a return of over 7 per cent for the investors.
  5. It can comprise corporate debt securities in the form of bonds, credit-linked note, debentures, promissory notes as underlying instruments.

 

What are ETFs?

Exchange Traded Funds (ETFs) are mutual funds listed and traded on stock exchanges like shares.

Typically, an ETF mirrors a particular index, which means the group of stocks in the ETF would be similar to those in the index that it is benchmarked to.

Usually, ETFs are passive funds where the fund manager doesn’t select stocks on your behalf. Instead, the ETF simply copies an index and endeavours to accurately reflect its performance.

In an ETF, one can buy and sell units at prevailing market price on a real time basis during market hours.

 

Benefits and significance of ETFs:

  1. ETFs are cost efficient. Given that they don’t make any stock (or security choices), they don’t use services of star fund managers.
  2. They allow investors to avoid the risk of poor security selection by the fund manager, while offering a diversified investment portfolio.
  3. The stocks in the indices are carefully selected by index providers and are rebalanced periodically.
  4. They offer anytime liquidity through the exchanges.

 

Sources: the Hindu.