Selling ETF units to AMC directly incase of illiquidity in exchange query!

raoawesome · December 22, 2022, 3:06pm

So ETF’s are not popular in India. However that shouldn’t stop us from buying and holding ETF for investment purposes. I am trying to get a through understanding of what do we do incase if we do go down the route of buying an ETF which is quite illiquid.

I am trying to understand the complete process & solution on what to do incase if we have ETF and there illiquidity and we cant sell it in exchange and need to redeem it directly with AMC and what’s the process involved.

So based on the news I collected:-

So it’s written:-

Sebi said that “Investors can directly approach the AMC for the redemption of units of ETFs for transactions of up to Rs 25 crore without any exit load.”

The redemption of up to Rs 25 crore transaction without exit load has three scenarios wherein it can be used.

● Traded price (closing price) of the ETF units is at a discount of more than 1 per cent to the day-end NAV for 7 continuous trading days, OR

● No quotes for such ETFs are available on stock exchanges for 3 consecutive trading days, or

● Total bid size on the exchange is less than half of the creation units size daily, averaged over a period of 7 consecutive trading days.

As checked AMC says the same

https://arch.icicipruamc.com/Acceptance-of-Direct-Redemption-for-ETFs.aspx

Also, I found someone in this forum was able to sell off his ETF units(fractional units) directly to AMC offline

Continuing the discussion from Step by step guide to redeem fractional units of Liquidbees (Zero paperwork):

@Bhuvan :- So based on this , My question is if we buy any one of those illiquid ETF in kite i.e MON100 ETF, DSP liquid ETF etc, & based on SEBI’s conditions, do we have to sell the ETF units back directly to AMC as mentioned by the guy in this forum to exit? Can you share the complete process of this( I didn’t understand what’s a BOID and where to get it? )Do we need DIS booklet to sell ETF units offline to AMC ? Will Zerodha provide end to end support in selling illiquid ETF to AMC for redemption ?

It might be useful for us, illiquidity won’t be a bottleneck for ETF’s if exit process is clear.

Note:- I just want to know the complete end to end process of selling ETF to AMC . Paper work does not matter!

neha1101 · December 22, 2022, 4:00pm

A related query, why do you say MON100 ETF is illiquid.

I am invested in Motilal Oswal Nasdaq 100 ETF. I can buy and sell without any issues. There was a disconnect few months back due to restrictions imposed by RBI/SEBI when iNAV and the market price, variance was wide. The market price was at a premium when compared to iNAV only the new investors got affected and not the existing holders. At that time I was selling and transaction was going through without any issues.

Today volume was 474,634. I did buy few units today as well. Never felt any illiquidity issue.

raoawesome · December 22, 2022, 4:30pm

Whoops! Seems like a bug in kite. The bid showed no orders, only ask was there

Then I clicked show depth of market and I can see everything. Not sure if it’s a bug

Well honestly a majority of ETF’s are illquid to an extent and it doesn’t makes sense to overlook them nor stop doing manual SIP just because it’s illquid. I wanted to know the complete process of exiting a ETF by selling units to AMC & redeem them incase I am unable to sell it in exchange. Best to know the in’s and out before jumping into a financial investment product. MON100ETF was the quickest thing I saw as in kite as being illiquid so used it as example . I didn’t check depth before you commented.

I am looking to track:-

Nasdaq 100
S & P 500 index

All by ETF . I was nearly going to open account with vested app for vanguard s & p 500 etf.

Can you tell me what ETF is there for S & P 500 ? I figured MON100 for Nasdaq 100, what’s the expense ratio, is that justified , are charges less unlike opening account with vested platform? Your views and feedback?

GB26 · December 22, 2022, 6:37pm

From what I know, for Juniorbees from Nippon, in order to sell the units to them, the minimum units one can sell is 10,000.

Must be the same with other ETFs from other fund houses too.

This is the one of the reasons why ETFs are not suggested for long term investing.

raoawesome · December 22, 2022, 8:06pm

I don’t think so. From the news SEBI and icici AMC both says we can redeem ETF units from them as investors rather than MM/AP if market is illiquid and under certain conditions. I am pretty sure this info is proper! Let’s confirm this!

Also I attached link in this forum, that guy was able to redeem fractional ETF unit. So it should be possible to redeem any ETF even fractional ones too!

GB26 · December 22, 2022, 8:23pm

ICICI AMC mentioned a few conditions, so I guess those conditions have to be satisfied.

Also, that user redeemed Liquidbees, so rules could be different I don’t know.

My personal view is that, investing in ETFs is taking a bit of a chance considering they are not straight forward and have a little complex structure. So I haven’t yet gone beyond a particular allocation, even for the Nifty indices. Although paradoxically, they are one of the easiest products to buy without any thought.

So if you want to buy, take all of their details into consideration, and if you are already an investor, ask the AMC directly.

neha1101 · December 23, 2022, 4:12am

I am invested in ETF and hence your query made me curious. SBI Nifty 50 ETF has the following conditions

Unit holders, other than Authorised Participants and Large Investors, can redeem units in less than Creation Unit Size of the Scheme directly with the Mutual Fund in the following cases:

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, or
No quotes for such ETFs are available on stock exchange(s) for 3 consecutive trading days, or
Total bid size on the exchange is less than half of creation units size daily, averaged over a period of 7 consecutive trading days

In such a scenario valid applications received up to 3 p.m. by the Mutual Fund shall be processed and the Redemption proceeds would be paid in cash and would be as per the NAV of the Scheme declared by the Mutual Fund at the end of the day on which the Redemption request is received. Any redemption as specified above shall be made without any payments of Exit Load.

Note : Please select the date below to check the availability of this direct redemption option

My view:
Unitholders irrespective of the number of units you own, can sell the same directly with the AMC if the above mentioned conditions are met. I dont see anywhere that the unit holders should have a minimum number of units to sell directly. Do note, that the sell can only happen if there are no quotes in the market. Ultimately, the AMC do own the underlying securities and when they have the securities , they will sell and return the money based on the then present NAV.

At the same time, you can buy the ETF directly from the AMC based on the creation size and no need to buy from the secondary market. However, the creation size will be high.

AUM and volume are important consideration but important factors are market makers and liquidity of the underlying ETF. Market makers orders will not be displayed and hence I was told that you should never put a market order when buying an ETF. Always go for Limit order. Unfortunately, none of the AMC advise who their market makers are. I wrote to AMFI and SBI asking why this information is not disclosed in their document but no response.

Quoting below from varsity

Is the AMC focussed on ETFs?**

Today, most of the AMCs offer ETFs but doesn’t mean they are serious about them. Most of the ETF volumes are in ETFs offered by Nippon, ICICI, and SBI largely. Other AMCs like Mirae, Edelweiss with their debt ETFs do seem serious about building out their ETF offerings. So, along with the other things on the due diligence list, you’ll also have to look at whether an AMC is serious about the ETFs it offers. For example, if you look at some of the ETFs by Aditya Birla Mutual Fund, IDBI, LIC, Indiabulls etc., they have horrible tracking errors and almost no volumes.

Do read the attached from Varsity, it is comprehensive.

neha1101 · December 23, 2022, 4:23am

I found Motilal Oswal have a Index fund for S&P500. I do not think there are any ETF for s&p 500 from india similar to Mon100. I may be wrong on this count.

Bhuvan · December 23, 2022, 6:39am

Same as the off market transfer process. PS: What you are mentioning is a possibility only in high lillquid ETFs. If you stick to liquid ETFs from Nippon, ICICI, Motiala etc, very slim chances of this happening