THERE are many exchange traded funds (ETFs) that are available in India now. The maximum attention is focussed on funds that track the Sensex or the Nifty and gold ETF.
The availability of varying options has opened up a large number of opportunities for investors to get a different kind of exposure for their portfolios. Investors need to put in some effort to ensure they are making the best out of the situation.
Basics: A mutual fund has a net asset value (NAV), which forms the basis for transactions that take place in the fund. The price at which the units of the fund are sold and purchased by the investor depends upon the NAV.
There is a restriction that is present in this system because the individual will find that there is only one price at which they can transact even though there might have been a lot of changes that are taking place throughout the day in the value of the fund.
This makes the closing value the only relevant value. On the other hand, ETFs are like shares that an investor can trade during the day so as to take advantage of the multiple values that are possible.
All the factors here are like mutual funds except for the trading part, whereby they are available on the stock exchange.
Most ETFs are index funds so they are passively managed funds. Here are some examples of the variations that are visible in the Indian market.
Slightly active: Most of the ETFs are passively managed funds, but one can still see that in some of them there is a slight bit of active management that is present. A majority portion of the fund assets still maintains its passive management feature, as this will track the index.
So, for example, a fund where 80 per cent to 90 per cent is in the same proportion as the Sensex while the remaining 10 per cent to 20 per cent is actively managed will be this kind of fund.
This means that the overall proportion of the holdings in the portfolio will be different from what the index might suggest and hence this would make the fund different.
This would mean that there could be a slight chance of an outperformance or underperformance from the fund depending on how the actively managed part performs. Independent index: There could be an ETF that is modelled on the basis of a separate index that is created by a mutual fund.
There can be different ways in which this could be done. One would be where the components of the index are different from the leading indices present in the market, while the other example could be where the components are similar to the leading indices but their weights are different.
This might seem to be similar to the option above, but there is a difference here because in the former the actual decision about the portfolio holdings for the active management part is dependent upon the fund manager.
In this case the function depends upon the composition of the index that has specified features and the portfolio matches this differently constructed index.
Sectors: The ETF exposure can also extend to various sectoral indices that form the basis for the ETF portfolio composition.
What this means is that there can be tracking of the index that comprises of a specific sectors such as autos or pharma or banking as per the availability and investor interest.
This by a simple action ensures that there is a wider choice in terms of selection options for the investor because they are able to ensure that they have an exposure where they feel there is a better chance of growth. There will also be a higher risk to this investment.
Foreign exposure: ETFs can now also ensure a foreign exposure for the portfolio because slowly ETF based on foreign indices are also making their way in the Indian market.
At present, the choice is limited but as the situation changes there will be a larger choice as the options in front of the investor increases. This will mean that the investor will also be able to trade on the value of a variety of foreign indices just like they do with the local indices using the ETF route.
