As a testament to the growing popularity of ETFs, Tata AMC has filed papers with SEBI for a Nifty ETF. The ETF will track the benchmark Nifty 50 Index. The filing represents a growing trend in the mutual fund industry towards ETFs (Exchange Traded Funds). SBI Mutual Fund has filed for a ‘Quality’ ETF, ICICI Prudential Mutual Fund for a Nifty Next 50 ETF and HDFC Mutual Fund for a ‘Low Volatility ETF.’
What is an ETF?
An ETF or Exchange Traded Fund holds a basket of securities, just like an ordinary mutual fund. However, you cannot buy their units directly from the fund house or sell units to the fund house except in very large quantities. Instead, you buy and sell them on stock exchanges. ETFs also usually track indices in a passive manner. This means there is little role for a fund management team to play. This keep costs low.
About the Nifty ETF
The proposed ETF will invest 95-100% of its assets in Nifty 50 stocks as per the weights assigned to them in the index. The balance 0-5% will be invested in money market securities and units of Tata Liquid Fund. The benchmark of the scheme will be the Nifty 50 Index. The scheme will have a minimum investment of Rs 5,000.
The Nifty 50 is a free-float market cap weighted index. It assigns larger weights to larger companies. It has one-year returns of 12.7% and five-year returns of 14.6%. It is dominated by the financial services sector (37%), followed by Energy (15%), IT (13%) and Consumer Goods (11%). In terms of stocks, it is led by HDFC Bank, Reliance Industries, HDFC, Infosys and ITC, in that order.
In other words, investing in the Nifty means investing heavily in financial services and the HDFC twins specifically. However, the index has held up well over the past year even as the broader markets have struggled, pushing index ETFs to the top of the rankings.