India Infoline Asset Management Company is the latest to enter the mutual fund industry. Its first offering is an exchangetraded fund (ETF) called IIFL Nifty ETF. The fund will invest in securities that make up the S&P CNX Nifty Index, in the same proportion as the index. The Nifty tracks the behaviour of a portfolio of bluechip companies, the largest and most liquid Indian securities.
Exchange-traded funds score on account of their low-cost structure when compared with actively managed fund. The IIFL Nifty ETF proposes to have one of the lowest cost structures in the industry with expense ratio capped at as low as 0.25%. Actively managed funds charge a fee of between 1% to 2.5% as expense ratio.
There are two things to look at in an exchange-traded fund. One is the size of the fund and the second is the tracking error. Tracking error tells us the difference in return between the actual fund and its benchmark.
Both these aspects can be gauged once the fund has been in existence for some time and has a track record. Hence, experts advise investing in such funds through the secondary markets, rather than in NFOs.
The fund size should be big enough so that investors are not exposed to the moves of a single investor or a group of investors.
Exchange-traded funds are popular in the global markets where they account for 5% of the industry. In India, however, they are yet to pick up and account for merely 1% of the size of the industry.
The IIFL Nifty ETF new fund offer (NFO) is open till October 12. Investors can either buy it during the NFO or from the NSE once it is listed 10 days after the NFO closes.
However, to buy it fromthe stock exchange, investors need to have a broking account as well as a demat account, which come at a cost.
WHY INVEST:
The fund has one of the lowest expense ratio of 25 basis points. The Goldman Sachs Nifty ETS has an expense ratio of 50 basis points.
WHY NOT TO INVEST:
Since an ETF has no history, one cannot say with certainty what the tracking error will be. A high tracking error is not good for investors.
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