Ask me anything about Zerodha Fund House

AMA (Ask Me Anything)
167

Hi,

Let me explain my POV, as to why investing through ETFs is not that bad, rather it has its own advantages.

i have invested in a few ETFs , thanks to the concept of GTTs, on budget day many such ETFs had a sharp fall of almost 5 to 6 % and I was able to buy them cheap as many of my GTTs got triggered, if it was through mutual fund I would have ended up paying the closing NAV for the day, and since the market corrected quickly, i would have been able to buy it at a 5 to 6% discount, rather it would have 1 or 2% lower than the previous days NAV .

So there are some advantages to investing through ETFs when they are priced fairly, the cut off time in mutual fund is a bit out off for me, as sometimes even if invested with in the cut off time, the units gets alloted based on next dayā€™s NAV and assuming the market recovered the next day, i would actually end up loosing by paying a higher price than what I expected.

168

Hey Sai,

Any ETF is dependent on the underlying market it tracks. In this case itā€™s the physical Gold market. The sharp reduction in customs duty has led to a demand/supply mismatch in the physical gold market which in turn is having an impact on the pricing of all Gold ETFs. We are cognizant of this issue and are working closely with the market makers to resolve it.

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170

Hi,

This might sound naive and even lame, but i am just trying to understand how current reduction in customs duty, affects the gold that has already been bought by paying the old customs duty rate.

Letā€™s say as of 22nd July, the value of gold is ā‚¹115 (ā‚¹100 + BCD of 15%) = ā‚¹115.

Now, after the budget announcement leading to reduction in the BCD on gold from 15% to 6%, shouldnā€™t this affect only the future purchases, as gold doesnā€™t reduce or lose its value because of future reduction in customs duty.

Letā€™s assume for example, there is no fluctuation in the base price of gold i.e ā‚¹100.

Now any gold that was bought and held before the BCD reduction would have a value of ā‚¹115 inclusive of duty .

Now if I buy gold hereafter, the value would be. (ā‚¹100 *106%) = ā‚¹106.

Now we have old gold at ā‚¹115 and new gold at ā‚¹106 assuming each represents one unit, the current price of per unit will be

(ā‚¹115+ā‚¹106) / 2 = ā‚¹110.5

So that is close to 4% reduction in the gold value purely due to the reduction in the customs duty , am I right ?.

What is the % reduction in the gold value which is purely attributable only to reduction in customs duty, and not considering the impact of fluctuation in its price.

Please excuse me if i had made any gross mistake in my above calculation or understanding of the impact of the current reduction in customs dutyā€¦

I can understand if the price of the gold fluctuates due to the global demand and supply, but for a country specific reason like custom duty reduction, how can gold already held lose its value, wouldnā€™t it lead to loss if i had purchased it at ā‚¹115 and expected to sell it at ā‚¹106, simply because of prospective reduction in customs duty.

171

Old gold buy price is 115, it is not valued at 115. If everyone can buy at 106 in the market, your ā‚¹115 gold is now valued at 106, which is what NAV is.

Someone has to buy from you at >115 for you to value it at 115 right.

172

I do get the point, all i wanted to confirm was that the change in value is not attributed to the global value of physical gold price, rather this change in value is purely attributable to reduction in customs duty and if a jeweler purchased a piece of gold at ā‚¹115 paying old duty rates, why should he suffer a loss purely because the rate of duty has been changed after the budget.

This change in value is not due to demand and supply but rather due to reduction in duty.

I just canā€™t understand how it would affect me if ran a jewellery store and how can buying cheap in the future compensate for the higher price I paid for gold already bought

173

And to add to this point ppl who have knowledge of such reduction in customs duty (i.e., ppl with connections) could have made a neat profit by selling before the days leading upto the budget and could have bought them back at cheaper price now.

No one can predict what the price of gold is going to in the future, obviously there will be constant fluctuations, but when it comes to reduction in gold price purely because of customs duty reduction, how can anyone anticipate that and how can they recover the loss that one will incur purely because of sudden drop in customs dutyā€¦

Forget the jeweler, if i had bought some Gold ETF just before the budget, and now due to this the gold suddenly drops by more than 6% , it would take months for me to break-even, this is equivalent of a market crash for gold.

174

Yes. That is what Iā€™ve been saying.

Yeah brother thatā€™s just plain insider trading. Not some unique thing.

Yep. Thatā€™s what it is.

No once can. Government is doing whatever it wants. Blame the FM for being so unstable with her financial policies. Causing losses for investors.

175

Hi @VishalJain, I have sip going on in LM 250 index.

I was wondering if we can have Variations in the scheme like having equi weighted, similar to N50 index fund. Assuming equi weight is less skewed and have perform little better in long run.

I dont have tool to backtest but can you please throw some light on its possibility & performance?

176

Hi

Is it not mandatory for ETFs in their fact sheet to mention who their market makers are. I always thought AMCs such as SBi and UTI will have their own market makers, however, I read the attached article and it says in India 80% of ETFs are serviced by 3 major market makers. Are these 3 market makers so big that they can service the entire Indiaā€™s ETF market.

Quote
There are three popular market makers in India: Parwati Capital, East India Securities and Kanjalochana Finserve. All the AMCs mostly use these three brokers for market making purposes of its ETFs. Almost 80% of the market making activities for an ETF is done by East India Securities and 20% by othersā€¦
Unquote.

Is there any restrictions for AMC such as SBI or UTI or any such AMC to have their own market makers.

Read more at:

NSE website says the following but it does not say which ETF is taking the service of which market maker.
https://www.nseindia.com/products-services/emerge-sme-market-makers-list

Market makers are critical for ETFs and SBi has one of the largest ETF - SBI Nifty 50 ETF - AUM of 193,633 crore and does not have its own market maker? Strange.

177

Hey Neha, thats for your query. No, its not mandatory to mention the names of the market makers in the factsheet. Yes, the number of market makers for ETFs at this time in India is limited but i expect many more to start in the next 1-2 years. AMCs themselves cannot do market making. Market making itself is a professional activity and the industry as whole is working towards getting more players. Hope this helps!

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178

Hey Akash, yes there are indices which are equal weighted and also a few of the AMCs have products on them. The performance of equal weighted indices is mixed. In effect what one is doing is reducing the weights of the larger stocks and increasing the weights of the smaller stocks, which may increase volatility of the index.

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180

KIM - Key Information Memorandum - states the following

Market Makers and Large Investors can directly subscribe to / redeem units of
the Scheme on all Business Days with the Fund at iNAV based prices on an ongoing basis.

I am sure Vishaljain wil give more information. The above is standard for all ETFs and I am told large value investors can redeem directly with the AMCā€¦

183

Stick to mutual funds for such things. Without liquidity, an investment is worth 0.

184

If these ETFs get added to some smallcases or Zerodha FoFs then liquidity might improve. Generally Nifty 100 ETFs have lower liquidity compared to Nifty 50 ETFs.

186

Hi, volume in Zerodha ETFs are still fairly low as they have recently been launched and would get traction over a period of time. In every ETF there are market makers who under normal market conditions, trade 0.5% around the Indicative NAV. Its important to put limit orders in ETFs and not market orders for all ETFs and esp the not so liquid ones. You could keep putting buy/sell limit orders around the price as i mentioned and usually the market makers will know if there is a large buyer/seller and start to put larger sizes. Incase you still find any difficulty to transact large orders, you could connect with us on [email protected] with your contact number and we will call you back. Hope this helps!

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187

Hi
Generally, when do a AMC reduce the face value of the units from 10 to 1.

Is it when the market price goes very high. Example - SBI Nifty Next 50 ETF has a market price of 767 (approx) with a Face value of 10 per unit. Will it not be good business sence for the AMC to reduce the face value to 1 so that market price falls proportionately and more people will buy.

I understand there will be no impact overall but fall in price might attract more people to subscribe to the units.
One of my friend, wanted to invest in Nifty Next 50, I told her about SBI, but she chose Icici pru Nifty Next 50 as it had market price of 75 (approx) although FV was 1.
Her preference was SBI but went for Icici pru as there was no impact. By retaining FV at 10 is SBI AMC losing new subscribers.

188

Hey Neha, yes generally smaller ticket size attracts more retail participation. Its usually the AMCs call if and when to do it.

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189

Hi @VishalJain - There seems to be no launch of any NFO from your fund house. I was expecting one on the Equity & Gold you have filed with SEBI. Also Mirae has launched an ETF for Nifty 500 multicap 50:25:25. Do you have any plans to launch ETF oriented funds like Nifty 250 ETF etc as you already have enough foundation products in ETF formats

190

In fact there are couple of funds which are actually doing this, they invest in US treasuries and try to give a return which would ideally hedge USD-INR movement.
I was actively considering investing in one from IDFC for parking my short term money earmarked for foreign travel
IDFC US Treasury Bond 0-1 Year FOF to launch soon: Should you invest? - The Economic Times (indiatimes.com)

But after detailed review, I didnā€™t find it worth the effort. I realized that liquid fund still generates better return then INR depreciation.

There are couple of others funds which invest in US treasuries.

If the goal is long term, it does not really make sense to invest in USD.
Agree that depriciation of INR looks big, but then USD asset does not earn very high return. So effectively Indian equity would still give better return then INR depriciation+ USD returns.

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191

Hiā€¦ the Equity & Gold product may take a while and would not be able to give a timeline on that. We do not have any immediate plans to do a 500 stock index. As for the Nifty 250, you could combine our TOP100CASE ETF and MID150CASE ETF in the ratio that works for you and would give you exposure to the 250 companies. In the coming few weeks we would look at completing some basic exposures through the open-ended fund format and later focus on some debt exposures in the coming months. Hope this helps!