In developed nations, investors prefer ETFs over actively managed funds as in a mature market it becomes increasingly difficult to generate a return greater than the return the underlying index generates.
An Exchange Traded Fund (ETF) is a portfolio of stocks that replicates the portfolio of a market index that it follows. For example an ETF that follows BSE Sensex will have same stocks in same proportion that the Sensex has. As ETFs closely follow the underlying market index, they are also called Index Funds and would ideally have a Beta of 1, that is same market risks that the index face.
As the portfolio of an ETF composes same stocks that of an index, it need not be actively managed. So, ETFs are also called passive funds and have lower expense ratios than actively managed funds. The advantage of investing in an ETF is that you don’t have to buy the expensive individual stocks of an index to earn a return the index generates and by investing a small amount, you will get a portfolio constituting fraction of each stocks in same proportions that the index has.
In developed nations, investors prefer ETFs over actively managed funds as in a mature market it becomes increasingly difficult to generate a return greater than the return the underlying index generates. India also seeing increasing number of fund houses and indices introducing ETFs every year.
Going by the trend, SBI Mutual Fund has introduced SBI-ETF Quality, that will invest in the underlying index, NIFTY200 Quality 30, which includes top 30 companies from its parent NIFTY200 Index selected on the basis on their ‘quality scores’. Based on three factors, the quality score for each company will be determined – profitability, leverage and earnings growth variability.
The investment objective of SBI-ETF Quality is to provide returns that closely correspond to the total returns of the securities as represented by the NIFTY200 Index, subject to tracking error. However, there is no guarantee or assurance that the investment objective of the scheme will be achieved.
The minimum application amount of the fund during the NFO period is Rs 5,000 and in multiples of Re 1 thereafter. However, after the NFO period, authorised participants and large investors will be able to purchase or redeem in blocks directly from the fund in creation unit size of 12,000 units and in multiples thereof on any business day. Otherwise, the existing and interested investors may purchase or redeem units of the scheme on the exchange in minimum lot of one unit and in multiples thereof.
As ETFs are traded directly on the National Stock Exchange (NSE), the units of the scheme will be available in dematerialised (electronic) form only and applicatins without the details of Depository Participants (DPs) of either NSDL or CDSL will be liable to be rejected.
The New Fund Offer (NFO) of the scheme opens on November 26 and will close on December 3, 2018 and the allotment will be completed within five business days after the closure of the NFO. The fund will be re opened for regular trading within five business days from the date of allotment. The fund will be listed on NSE and the index re-balancing will be done semi-annually.
The scheme will be a high-risk one as 95-100 per cent of the total assets will be allocated to equities or equity related instruments like derivatives and only 5 per cent of the assets may be invested in Money Market Instruments like Commercial Papers, Commercial Bills, Treasury Bills, Government Securities having an unexpired maturity up to one year, call or notice money, certificate of deposit, usance bills, and any other like instruments as specified by the Reserve Bank of India from time to time.
If you are not a risk-averse investor, you may take the opportunity to invest in the scheme to earn the market return generated by the country’s top broad-based index.