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New Kid on the Block

Here's a new twist to the sectoral story - and to the Exchange traded fund (ETF) story too - India's first sectoral ETF. Benchmark Mutual fund has launched launch country's first open-end banking sector exchange traded fund, the 'Banking Index Benchmark Exchange Traded Scheme' (Bank BeES). The intial public offer for the fund opened on May 25, 2004 and closed on May 26, 2004. On June 4, 2004, the fund got listed on the Capital Market Segment of NSE. The fund will track the CNX Banking Index.

As with other ETFs, ownership of this fund will confer the benefits of the underlying index. Investing in this fund will thus mean that you will own shares of 12 largest publicly traded banks in India. As the index selection criteria requires that trading frequency should be at least 90 per cent in the last six months, this means that your underlying assets are liquid.

If we assume that you like the idea, are you ready to run to your distributor with cheque in hand? Well hang on for a second. This is an exchange-traded fund and not an index fund. ETFs may be index funds but, unlike normal index funds, they can be bought and sold at intra-day prices throughout a trading day. In this respect they are more like shares rather than like mutual funds.

Since ETFs can to be transacted upon throughout the day, they are bought and sold through stockbrokers (using a demat account) just like shares. There are other differences also. The NAV of an ETF is a fraction of the value of the index. Units of Bank BeES will have a face value of Rs 10 each and will be approximately equal to 1/10th of the value of the CNX Bank Index. As the values of the CNX Bank Index are not publicly disclosed, it is not possible to ascertain how the NAV of this fund will look like. Till then the minimum amount required to purchase units of this fund will be a mystery.

In the case of other mutual fund schemes, the fund buys back and sells units. In a way, an ETF resembles a close-end scheme where the units are not sold back to the fund and investors buy and sell the fund units in the market.

As supply of units can be altered quickly there is no discount to NAV like closed end funds. Trading of the units ensures that underlying stocks do not have to be brought or sold. Investors entering and exiting do not also affect existing investors. As a result an ETF has a much lower tracking error than an index fund.

With this launch, another option besides the Reliance Banking Sector Fund is open for those who seek exposure to bank stocks. Thus both active as well as passive management is now available for those who seek undiluted exposure to bank stocks.