AMA on ETFs - Ask Me Anything on Exchange Traded Funds

Exchange Traded Funds (ETFs) have come a long way in India since the first scheme was launched in 2001. Retail participation has grown significantly, with folios increasing from about 18 lakhs in March 2020 to over 1.3 crore by March 2024.

ETFs can be used in many ways such as building an asset allocation strategy for creating a diversified, long-term investment portfolio, they can be bought and sold at real-time market prices throughout the trading day and offer features typically associated with stocks, such as limit orders, stop-loss orders, margin buying, and hedging strategies. Additionally, the minimum investment requirement is 1 unit, making ETFs accessible to a wide range of investors.

If you’re curious to understand more about ETFs or how to use them effectively, I would be happy to dive deep and take any questions you have, feel free to ask me anything!

Disclaimer:
The Information provided during the Ask me Anything (AMA) session is for general knowledge and informational purposes only and does not constitute financial advice by any means whatsoever.

Investing in mutual funds and other financial products involves risk, including the potential loss of principal. Past performance is not indicative of future results. Before making any investment decisions, investors should conduct their own research and seek advice from qualified financial advisors to ensure that the respective products and strategies are suitable for their specific financial situation and objectives.

Hi, I want to understand the whole process step-by-step about how to trade with AMC for creation size redemption or creation.
For example, say you see a ETF premium in the secondary market to inav, and you plan to buy the creation size from AMC. How does the whole process works. Has anyone ever experienced that from start to trade execution? How much time it takes for the units to show at your demat , is it immediate or does it have settlement time T+x something ? and from demat how much time does it require to reflect at your zerodha trading account ?
Also if you’re aware of the costs and taxation involved in doing the whole process?

@VishalJain good afternoon, is it a good strategy to look at the etf volume on nse post-market to better understand where people are trading their money? for example, i noticed that during the week and the week before the hang seng index went up, the hang seng etf was among the top 5 traded in our market in terms of volume. i just want to ask your expert opinion on this. is this a known pattern?

Large investors can directly transact with AMC in “Creation unit size” subject to the value of the transaction being greater than the threshold of ₹ 25 crores as specified by SEBI.

Subscription : The investor has to send the transaction application and transfer the funds to the AMC bank account. On receipt of the same the Fund manager would execute the trades in the market. The transactional NAV advice is shared with the investor on T day. The ETF units are credited generally by T+1 day to the investor demat account.

Redemption: The investor has to send the transaction application and transfer the Units in multiples of creation unit size to the AMC demat account. On receipt of the same the Fund manager would execute the trades in the market. The transactional NAV advice is shared with the investor on T day. The redemption proceeds are credited generally on T+1 day to the investor bank account.

This process is fairly smooth on a day-day basis.

ETFs are mutual fund units and therefore taxation will be applicable depending on whether it is equity, debt or commodity

Hey, I would suggest you decide investments based on your goals, risk appetite and holding period. ETFs trade just like any other stock and therefore for every trade requires a buyer and seller, basically two people having a contrarian view so not sure if one could derive any conclusion looking at volumes.

Hi @VishalJain

What if the ETF I’ve bought is low on liquidity few years later and I had to sell it ? Will the AMC help in purchasing back the units? What are the conditions to met for the AMC to purchase back my ETF units?

Thanks for your time.

Hey @VishalJain

I was looking at Silver ETFs and noticed that, on a day-to-day basis, they don’t always move in the same direction as silver prices. Even when they do move in the same direction, the magnitude of the movement isn’t the same. For example, on November 28th, when silver was down by only 0.5%, the ETFs dropped by 1.5-2%. Similarly, on November 29th, when silver rose by 0.7%, the ETFs increased by 1.5-2%. I have noticed this discrepancy on many occasions. There are even days when silver is up by 0.5%, but the ETFs are down by 0.5%. and this was the case with all the silver ETFs.

Hi @VishalJain,

  1. Are hybrid ETFs permitted by regulations today. If not, does MF Lite regulations cover ETFs as well?
  2. Can Gold mutual funds only invest in Gold ETFs and not directly in gold. I would like to invest in Gold funds but don’t want to pay the extra expense ratio.

Hi, passive hybrid products in the form of ETFs/Index Funds are not permitted as of now and form part of the MF Lite regulations. As of now Gold FOFs can invest only in Gold ETFs and not physical gold.

Hi @VishalJain Hope you’re doing good. Will ZFH continue to focus on passive funds or would there be also active funds later on? Thanks.

Hey Banerjee, no immediate plans of doing active.

1 Like

Investors can directly transact with the AMC with a minimum transaction amount of â‚ą25 crores in the said creation unit size for redemption. However, there are exceptions to this norm, for the scenarios mentioned -

a) Traded Price (Closing Price) of the ETF units is at discount of more than 1% to the day end NAV for 7 continuous trading days
b) No quotes for such ETFs are available in stock exchanges for 3 consecutive days
c) Total bid size on the exchange is less than half of creation unit size daily, averaged over a period of 7 consecutive trading days

So, if an investor wants to redeem his/her units with the AMC directly under the above mentioned scenarios, he/she needs to submit the application before the cut-off time (3 PM) and transfer the ETF units to the AMC DP Account. The NAV applicability will be the End of Day NAV.

Hope this helps!

I think there are two questions here as i understand. 1. Do commodity ETFs track the underlying? 2. Will all ETFs move together?

Firstly, commodity is traded round the clock internationally, and the underlying ETF in India is traded from 9:15 am to 3:30 pm. Secondly, the landed price in rupees of any commodity depends on demand/supply in India at that time. So for eg, silver may be up internationally but its not necessary that it will move in the same proportion in the domestic market as a lot depends on domestic factors as well. As India does not have a commodity spot exchange, its difficult to correlate and derive an exact spot price of any commodity and therefore most prices are only estimations using MCX (derivatives) or polling.

In addition to this, each ETF counter has its own dynamics in terms of investor base, demand/supply on that day, etc and therefore you will not find all ETFs trading together on a given day and this would be true whether its equity, debt or commodity.

Hope this helps!