First ETF Launched: The first Indian exchange traded fund was launched -- Nifty BeES from Benchmark Mutual Fund which is expected to list on the NSE on 8th January. Nifty BeES track the S&P CNX Nifty Index and will allow investors to buy a Nifty replica -- a diversified portfolio with one single decision. Nifty BeES will trade on the NSE. On listing one can buy or sell Nifty BeES in exactly the same way one buys or sells any other share. Each Nifty BeES will be approximately 1/10th of the S&P CNX Nifty Index. Nifty BeES are in dematerialized form and settle like any other share in the T+5 rolling settlement.
Nifty BeES will be continuously created or redeemed directly with the fund by authorized participants and large institutions, by exchanging a pre-defined portfolio of shares closely approximating the S&P CNX Nifty and specified amount of Cash. This continuous creation / redemption feature is likely to ensure that Nifty BeES trade close to their face value at any given time. Nifty BeES will be like buying Nifty as a share.
ETF will have a number of advantages over traditional open-ended index funds as they can be bought and sold on the exchange during trading hours at prices that are close to the NAV of the Scheme. They are unlikely to trade at a steep discount like listed closed-ends. As the ETF structure which allows "in-kind" creation and redemption of units directly with the fund by authorised participants i.e. exchanging a pre-defined basket of shares for units thereby allowing them to take advantage of any mispricing.
Gilt Vs. Gilt Funds: Buying gilt has been made easier for individual investors now. To attract retail participation, the Reserve Bank has notified that it will reserve 5 per cent of the total government securities auction for the individual investors. Retail investors can now place non-competitive bids through banks and primary dealers in the auction of dated government papers. And the price of the bonds will be the weighted-average rate that will emerge in the auction on the basis of the competitive bidding for the 95 per cent.
Gilts could be especially suited for retirees, orphan and widows seeking stable guaranteed income. And there may be a strong latent demand now, as there are very few long-term fixed income alternatives. But the lack of liquidity, tax inefficiency and interest rate risk associated with gilt is a dampener. It is not easy to buy or sell these bonds, as today only PNB Gilts is the sole largest primary dealer, given the constraints in terms of developing widespread availability of these bonds, it will remain beyond reach. And the gilt funds still have an edge over buying gilts directly for the convenience, diversification, high-liquidity and to an extent professional management. But good things come with a price tag. Hence, the only minus with a gilt fund is that the returns you get from are expense adjusted and little volatile.
Fund Update: During the week, the market fell 83 points on the Sensex and 42 points on the broad-based National Index. Healthcare funds were the key gainers during the week –
Pioneer ITI Pharma (2.12%), Sun F&C Resurgent India Equity (1.83%) and Magnum Pharma (1.65%). And technology weighted funds were big losers -- ING Growth Portfolio (-7.08%), Magnum IT (-5.25%) and Alliance New Millenium (-4.15%).