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​​​​​Exchange Traded Funds

Exchange Traded Funds are essentially Index Funds that are listed and traded on exchanges like stocks. An ETF is a basket of stocks that reflects the composition of an Index, like S&P CNX Nifty or BSE Sensex. The ETFs trading value is based on the net asset value of the underlying stocks that it represents.

In case of investment in any mutual fund scheme one can buy or sell units only on closing NAvs however in case of ETFs one can buy and sell (subject to availability of buyer/seller) in real-time at a price that changes throughout the day.

What are benefits of ETFs?

ETFs offer several advantages to investors : -

  • Can easily be bought / sold like any other stock on the exchange through terminals across the country.
  • Can be bought / sold anytime during market hours at a price close to the actual NAV of the Scheme.
  • No separate form filling. Just a phone call to your broker or a click on the net.
  • Ability to put limit orders.
  • Minimum investment is one unit. Enjoy flexibility of a stock and diversification of index fund.
  • Due to mergers, acquisitions or other occurrences that lead to the termination of the common shares of the Company.

How does subscription / redemption mechanism work in ETFs?

ETFs can either be purchased on the Exchange or directly with the Fund, if you are a large/Authorized person. The Fund creates / redeems units only in predefined lot sizes in exchange for a predefined underlying portfolio basket. Once the underlying portfolio basket is deposited with the Fund together with a cash component, the investor is allotted the units. This is in-kind creation / redemption of units, unique to ETFs.

Alternatively, investors can follow the "Cash Subscription" route in which they can pay cash directly to the Fund for purchasing the underlying portfolio.

How do ETFs derive their liquidity?

ETFs derive their liquidity first from trading of the units in the Secondary Market and second through the in-kind creation / redemption process with the Fund in creation unit size.

Due to the unique in-kind creation / redemption process of ETFs, the liquidity of an ETF is actually the liquidity in the underlying shares.

What are the advantages of ETFs over normal open-ended mutual fund?

  • Buying / Selling ETFs is as simple as buying / selling any other stock on the exchange.
  • ETFs allow investors to take benefit of intraday movements in the market, which is not possible with open-ended Funds.
  • With ETFs one pays lower management fees(because of passive/ index linked fund). As ETFs are listed on the Exchange, distribution and other operational expenses are significantly lower, making it cost effective. These savings in cost are passed on to the investor.
  • ETFs have lower tracking error due to in-kind creation and redemption.
  • Due to its unique structure, the long-term investors are insulated from short term trading in the fund.

What are the USES OF ETFs?

Asset Allocation : Asset allocation managing could be difficult for individual investors given the costs and assets required to achieve proper levels of diversification. ETFs provide investors with exposure to broad segments of the equity markets. They cover a range of style and size spectrums, enabling investors to build customized investment portfolios consistent with their financial needs, risk tolerance, and investment horizon.
Both institutional and individual investors use ETFs to conveniently, efficiently, and cost effectively allocate their assets.

Cash Equitisation : Investors typically seek exposure to equity markets, but often need time to make investment decisions. ETFs provide a "Parking Place" for cash that is designated for equity investment. Because ETFs are liquid, investors can participate in the market while deciding where to invest the funds for the longer-term, thus avoiding potential opportunity costs

Hedging Risks : ETFs are an excellent hedging vehicle because they can be borrowed and sold short. The smaller denominations in which ETFs trade relative to most derivative contracts provides a more accurate risk exposure match, particularly for small investment portfolios.

Arbitrage (Cash Vs Futures) and Covered Option Strategies : ETFs can be used to arbitrage between Cash and Futures Market, as it is very easy to trade. ETFs can also be used for cover Option strategies on the Index.

What happens to dividends?

Dividends received by the Scheme will be reinvested in the scheme. However, the Fund may also decide to distribute dividends to the investors.

What are the rules governing taxation of ETFs?

Same rules apply as in the case of buying or selling stocks or mutual fund units. Kindly refer the respective Scheme Information Document/Statement of Additional Information /Key Information Memorandum


The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. Certain factual and statistical information (historical as well as projected) pertaining to Industry and markets have been obtained from independent third-party sources, which are deemed to be reliable. It may be noted that since RNLAM has not independently verified the accuracy or authenticity of such information or data, or for that matter the reasonableness of the assumptions upon which such data and information has been processed or arrived at; RNLAM does not in any manner assures the accuracy or authenticity of such data and information. Some of the statements & assertions contained in these materials may reflect RNLAM’s views or opinions, which in turn may have been formed on the basis of such data or information.

Before making any investments, the readers are advised to seek independent professional advice, verify the contents in order to arrive at an informed investment decision. None of the Sponsor, the Investment Manager, the Trustee, their respective directors, employees, affiliates or representatives shall be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.​


Mutual fund investments are subject to market risks, Read all scheme related documents carefully.

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