UTI Launches an ETF

UTI Mutual Fund has launched an exchange-traded fund (ETF). Christened SUNDER (S&P CNX Nifty UTI Notional Depository Receipts Scheme), the fund's initial offer opens today on July 7, 2003, and will close on July 11. This will be the country's fourth ETF and the second one to have the S&P CNX Nifty as the underlying Index, next after Nifty BeES. The other ETFs are: Nifty Junior BeES and Prudential ICICI SPIcE. Nifty BeES was the first ETF off the block -- launched in December 2001 -- from Benchmark Mutual Fund.

An ETF is similar in appearance to an index fund. It too comprises a basket of securities, which are a part of a pre-decided index. SUNDER's portfolio will replicate the stocks of the S&P CNX Nifty in the same proportion as the index. ETFs trade like stocks so they are essentially index stocks that combine the benefit of a mutual fund with a listed stock.

The ETF units are issued and redeemed only in creation unit size in exchange for index securities by authorised participants. However, small investors can buy and sell ETF units in the secondary market at market price. Therefore, for small investors, the fund actually opens for subscription when an ETF gets listed on the index – SUNDER will be listed on NSE. But for that, the investor has to approach a broker instead of the fund distributor and consequently will have to pay a small commission to the broker to buy ETF units.

After getting listed, ETF units trade just like stocks and can be bought and sold through the day at market price. The market price will be at a discount or at a premium to the NAV depending on the demand and supply. The NAV is declared at the end of the day. In the case of SUNDER, the NAV will be 1/10th the value of the S&P CNX Nifty Index.

Fund Details
Issue opens – July 7, 2003
Issue closes – July 11, 2003
Face value of one SUNDER unit – Rs 100
Value of each SUNDER unit – 1/10th of the Nifty
Minimum trading lot – 1 unit
Minimum application size -- 10,000 units plus in multiples of 2,000 units in case of "Authorised Participants" and 500,000 units plus in multiples of 20,000 units for other investors.

An ETF could well swell up the asset base of the newly-formed UTI Mutual Fund although UTI is still the leader in terms of asset base, albeit by a narrow margin. With this ETF things could change dramatically. Let us explain how.

To escape the problems related to Unit Scheme 64 and its array of assured return schemes, UTI was split into UTI-I, a government administered vehicle responsible for these problem funds and all regulation-compliant funds into UTI–II, now styled as UTI Mutual Fund.

All the funds under UTI-I have a limited life, being a family of closed-end and open-end funds, with suspended sales. And the government is likely to issue bonds as these funds are gradually wound up. US 64 investors showed good appetite for the special class of tax-free government bond with added liquidity. The redemptions of some large MIPs and premature closure of funds like RUP and CGGF is expected shortly. As a result, the government ends up being the owner of the underlying portfolios. The current state of the aggregated portfolio of all funds of UTI-I is on these lines:

Total assets – Rs 2,1763.59 crore
Equity – Rs 8,935.64 crore
Bonds – Rs 11,725.35 crore
Cash – Rs 1,097.33 crore

Of its equity holdings:
76.83 per cent is in Nifty stocks
23.17 per cent is in other stocks (spread over 365 stocks)

A sizable part of the UTI-I equity asset is likely to find its way into UTI SUNDER. This will help the government achieve diversification, low-cost passive management and high liquidity for its portfolio. This will lead to the creation of the largest ETF, larger than any other fund in India and help UTI Mutual Fund take a big lead over other funds.