What are Exchange Traded Funds or ETFs?
Exchange Traded Funds or ETFs are investment schemes whose units are listed on stock exchanges. They can be traded just like equity shares. An ETF would have some underlying security or group of securities like an index, sector stocks or commodities, like gold. These underlying securities determine the ETF’s value. You can think of it as a mutual fund that you can buy and sell at real time prices throughout the trading day.
What is an Index ETF?
An index ETF is an ETF that has an index (of stocks, commodities or any other asset) as the underlying security. An index ETF would be a passive investment instrument. When the value of the underlying index appreciates, the ETF price goes up and vice versa.
What are the advantages of ETFs?
Ease of transactions:You can buy or sell ETF units through any member-broker of the stock exchange at your convenience.
Diversification: As each ETF is comprised of a basket of securities, it inherently provides diversification across an entire index.
Affordability: The unit cost of an ETF can be very low when compared to the prices of its constituents. These lower prices are attractive for retail investors, who otherwise may not have been able to afford the basket.
The investor has a better idea beforehand about where his money will be invested. ETFs generally move in tandem to the performance and yield of their underlying security.
Why should I invest in a Nifty-based Index Fund like the Quantum Index Fund?
The Quantum Index Fund is based on the S&P CNX Nifty (Nifty) Index (TRI). The Nifty is a well diversified 50 stock index accounting for 21 sectors of the economy.
The Nifty is computed using market capitalization weighted method, where the level of the index reflects the total market value of all the stocks in the index relative to a particular base period. The method also takes into account constituent changes in the index and importantly corporate actions such as stock splits, rights, etc without affecting the index value. Currently, the constituents of the Nifty account for a significant portion of the traded value of all shares on the NSE and aslo of the total market capitalization. So the Nifty would be an ideal investment for any investor looking to invest in India.
What will be the benchmark index for this scheme?
The S&P CNX Nifty Index (TRI) will be the benchmark of the scheme.
What is the investment objective of the scheme? What will be my return?
The investment objective of the Quantum Index Fund is to provide returns that, before expenses, closely correspond to the returns provided by the S&P CNX Nifty (TRI).
Why Quantum Index Fund? There are other Index funds available in the market.
The Quantum Index Fund seeks to offer investors an innovative and cost-efficient means to invest in the Nifty. Through the lower cost of operations and the availability of units having smaller denominations, the Quantum Index Fund would provide investors an excellent means of asset allocation. The total estimated expense ratio is 0.75% per annum.
Each unit of the Quantum Index Fund will approximately be equal to 1/10th of the value of the Nifty Index. As all Nifly Index ETFs track the same underlying (the Nifty), the only differentiating factor would be the costs. The lower the costs of the ETF scheme, the higher the NAV.
What are the applicable loads in the Quantum Index Fund?
Investors can buy and sell units of Quantum Index Fund on the NSE through any member broker or their online trading accounts. There are no entry or exit loads for the fund. However brokerage charges will be applicable, as charged by the broker / online trading service, to the investor for the buy/sell transaction.
How do you compare QIF units with other forms of investment in the Nifty Index?
Open Ended Mutual Funds
Close Ended Mutual Funds
- With ETFs, investors can take advantage of intra-day movements in the market. This is not possible with Open Ended funds.
- As ETFs are listed on the exchange, distribution and other operational expenses are significantly lower. These cost-savings are passed on to the investor.
- Buying and selling is also very easy. Like any other traded security, one can buy and sell ETFs through member-brokers on the stock exchanges. It would be as convenient as calling your broker on the phone or placing an order online.
- ETFs have a lower tracking error as the creation and redemption take place in the same proportion of shares as that of the Index. As Open Ended Mutual Funds have a larger number and a greater frequency of transactions, the tracking error may be greater.
The only similarity between Index ETFs and Closed Ended Mutual Funds is that both are listed on the stock exchange.
- In the case of the Closed Ended Mutual Fund, the number of units is fixed. Any demand supply difference could lead to the unit trading at a discount or a premium to the NAV. In the case of the Index ETF, the number of units issued is not limited. There are Authorised Participants and other market makers like arbitrageurs creating and redeeming units, giving adequate liquidity and keeping the price close to the actual NAV.
- Closed Ended Mutual Funds lack transparency. One does not know the constitution and value of the underlying portfolio on a daily basis.
|Criteria ||ETF ||Open-End Ended Fund ||Close-End Ended Fund |
|AUM size ||Flexible ||Flexible ||Fixed |
|Buying or Selling price ||Known ||Not Known ||Known |
|Counter Party ||Stock Market / Fund ||Fund ||Stock Market / Fund |
|Intra-Day Trading ||Possible ||Not Possible ||Possible |
|Cost of Transactions ||Brokerage ||Entry loads if Applicable ||Brokerage |
What is the tax treatment for the investments in Index ETFs like the QIF?
The same rules apply as in the case of buying & selling stocks / mutual fund units of Equity scheme.
|Parameter ||Time frame of holding ||Applicable Tax Rate |
|Short Term Capital Gains Tax ||Applicable before 1 year ||15% |
|Long Term Capital Gains Tax ||Applicable for holding of 1 year and above ||Nil |
Securities Transaction Tax (STT) is applicable at the time of sale and purchase of units on the exchange @ 0.125%. In the case of a squared trade, the STT payable by the investor is @ 0.025%.
In case of subscription of units directly with the Fund, no Securities Transaction Tax is payable whereas at the time of redemption, the STT payable by the investor is @ 0.25% .
What is the Asset Allocation pattern of the Scheme?
|Securities Covered ||% of Net Assets of the Scheme ||Normal Risk Profile of the Allocation Instrument |
|Securities covered by the S & P CNX Nifty (TRI) |
|90% to 100% ||High |
|Money Market Instruments, other short term debt ||0% to 10% ||Low |
|instruments as permitted under the SEBI (Mutual Funds) Regulations, 1996 and Liquid Schemes of Mutual Funds || || |
How can I invest in the Quantum Index Fund? What is the minimum application amount for subscription of units?
QIF is listed on the National Stock Exchange (NSE) with the Symbol QNIFTY. Investors may buy / sell the QIF units on the Exchange, through any broker-member including their online trading account. The minimum no. of units that can be purchased on the NSE is 1 unit.
Are there any special requirements for subscribing to the units of the scheme?
The QIF is available only in dematerialized form. So, applicants would be required to have a (demat) beneficiary account with a Depositary Participant (DP) of either NSDL or CDSL. Investors may call their brokers or use their online trading account to buy and sell units of the scheme. The NSE code of the fund is QNIFTY.
How are Transactions done on exchange settled?
The transactions are settled in demat mode as per the normal exchange settlement procedures.
How can I invest regularly in the scheme? Are Systematic Investment Plans offered?
Systematic Investment Plan (SIP), Systematic Transfer Plan (STP) and Systematic Withdrawal Plan (SWP) are currently not available.
However, investors can do their own systematic investment by regularly buying units every month from the NSE and accumulating their QIF holdings.
What happens if constituents in the underlying index change?
As mentioned earlier, the Nifty is computed using market capitalization weighted method. So, over time, the index members may change. The index service provider usually makes announcements of this change well in advance. Usually, on the day of change in underlying index, the fund would change the securities in its underlying portfolio by selling the securities that are going out and buying those stocks that are coming in. This will not affect the units being held by an investor, as the units will continue to track the index. The only effect may be a change in tracking error of the scheme. Portfolio Deposit and a Cash Component
Do ETFs have any advantage over Index Futures?
On the positive side, one can invest in Index futures without paying the complete value of the contract. The investors need to pay only the margin. They can also ‘sell’ contracts that are not in position. But the downside is that the investment timeframe is limited – futures contracts in India currently have a lifespan of 1 to 3 months. For holding for longer periods, investors would need to ‘roll over’ contracts, incurring transaction costs (brokerage).
The trading risks in futures contracts are also higher. If the index moves in an opposite direction to your expectations, you may end up losing even more money than you have invested. That is the risk of leverage. It works both ways. You can have super-profits or super-losses.
Index ETFs on the other hand, are cash market products. Investors can buy and hold them as long as they want without worrying about ‘roll over risks’. There are no daily mark-to-market or margin calls.
Index funds are optimal for investors who prefer to take nominal risks and do not leverage their capital.
Who are Authorized Participants and what is their role? Who are Eligible Investors?
The Authorised Participants (APs) are appointed by the AMC. They act as market makers to improve the liquidity of the ETF on the exchanges. The APs provide quotes in the exchange and ensure that investors have a ready buyer and seller any time they wish to enter into a transaction during market hours.
Eligible investors are investors who buy units in creation unit size. Currently the creation unit size is 2,000 units. Large investors can create units directly with the fund in the creation size by exchanging Portfolio Deposit and a Cash Component
Can existing investors of Quantum switch to the QIF?
Facility of switching from other Quantum funds to QIF is not available. QIF units may be purchased directly from the NSE through a member-broker or an online trading account.
How can investors redeem Quantum Index Fund units?
Quantum Index Fund can be bought or sold , just like any other security listed on the NSE.