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Comparative analysis of Exchange Traded Funds and Index funds
What is Investing?
Investing is how you make your money grow, or appreciate for long term financial goals. It is a way of saving your money for something further ahead in the future. Saving is a plan to set aside a certain amount of your earned income over a short period of time in order to be able to accomplish a short term goal. It is a plan of action where you plan on acquiring a certain amount of money by redirecting some of the money you have received from your various sources of income. Investing, on the other hand, is a much longer term activity. We consider investing as an action that is based on long term goals and is primarily accomplished by having your money make more money for you. Investing isn't gambling or speculation; it's about taking reasonable risks to reap steady rewards. Investing is a method of purchasing assets in order to gain profit in the form of reasonably predictable income (dividends, interest, or rentals) and appreciation over the long term.
Why Invest?
We should invest so that our money grows and shields us against rising inflation. The rate of return on investments should be greater than the rate of inflation, leaving us with a nice surplus over a period of time. Whether our money is invested in stocks, bonds, mutual funds or certificates of deposit (CD), the end result is to create wealth for retirement, marriage, college fees, vacations, better standard of living or to just pass on the money to the next
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Comparative analysis of Exchange Traded Funds and Index funds generation or maybe have some fun in our life and do things we had always dreamed of doing with a little extra cash in our pocket. Also, it's exciting to review our investment returns and to see how they are accumulating at a faster rate than our salary. Hence there are three main reasons to invest. we can beat inflation, achieve financial goals like buying a car or paying for college, and retirement. We can choose from many investing options. We can invest in stocks, mutual funds, or bonds.
When to Invest?
The sooner the better. By investing into the market right away we allow our investments more time to grow, whereby the concept of compounding interest swells our income by accumulating our earnings and dividends. Considering the unpredictability of the markets, research and history indicates these three golden rules for all investors 1. Invest early 2. Invest regularly 3. Invest for long term and not short term While its tempting to wait for the best time to invest, especially in a rising market, remember that the risk of waiting may be much greater than the potential rewards of participating. Trust in the power of compounding. Compounding is growth via reinvestment of returns earned on our savings. Compounding has a snowballing effect because we earn income not only on the original investment but also on the reinvestment of dividend/interest accumulated over the years. The power of compounding is one of the most compelling reasons for investing as soon as possible. The earlier we start
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Comparative analysis of Exchange Traded Funds and Index funds investing and continue to do so consistently the more money we will make. The longer we leave our money invested and the higher the interest rates, the faster our money will grow. That's why stocks are the best long-term investment tool. The general upward momentum of the economy mitigates the stock market volatility and the risk of losses. Thats the reasoning behind investing for long term rather than short term.
How much to invest?

There is no statutory amount that an investor needs to invest in order to generate adequate returns from his savings. The amount that we invest will eventually depend on factors such as: 1. Our risk profile 2. Our Time horizon 3. Savings made Remember that no amount is too small to make a beginning. Whatever amount of money we can spare to begin with is good enough. We can keep increasing the amount we invest over a period of time as we keep growing in confidence and understanding of the investment options available and so instead of just dreaming about those wads of money do something concrete about it and start investing soon as we can with whatever amount of money we can spare.
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INVESTMENTS
Investment is a term with several closely-related meanings in finance and economics. It refers to the accumulation of some kind of asset in hopes of getting a future return from it. Assets such as equity shares or bonds held for their financial return (interest, dividends or capital appreciation), rather than for their use in the organizations operations.
Return on Investments
The money you earn or lose on your investment, expressed as a percentage of your original investment. In Simple words, It is the amount received as a result of investing in particular ventures. Collective Investments SchemesFunds which manage money for a number of investors and pool it together. This enables investors to benefit from a larger number of individual investments and cost efficiencies. Short-Term Investments are generally investments with maturities of less than one year.
Capital Investments
Investments into the fixed capital (capital assets), including costs for the new construction, expansion, reconstruction and technical reequipment of the operating enterprises, purchase of machinery, equipment, tools, accessories, project and investigation works and other costs and expenditures
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Different Ways of Investing Money

Investing in the stock market, real estate and business ventures is referred to as an aggressive investment. It involves a certain amount of risk. On the other hand, a conservative investment involves a lesser amount of risk and includes the investments made in cash.
Stocks:
A share of the ownership of a corporation is termed as a share of stock. Investing in the stock market involves a considerable amount of risk. It requires a careful analysis of the share prices in order to invest in the right company at the right time. There are two types of stocks, common and preferred. While common stock holders carry voting rights along with a unit of ownership, preferred stock holders do not. Preferred stocks entitle the shareholders to receive payments in the form of dividends.
Stock Market:
The stock market is one option for investing your money. Stocks are unmatched in comparison to any other investing tool. They are the leading way to make money and stay ahead of inflation over time. This is ideal if you have long term investment goals. When you invest in stocks that a company offers, you are buying a share of that company. Depending on how well the company does determines how much each share is worth. Comparing stocks to savings accounts, the tendency is that stocks give you a higher rate of return on your initial investment. But that is not without a risk.
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Comparative analysis of Exchange Traded Funds and Index funds The risk is, your stock is not FDIC insured like a savings account. Whatever you put into savings you are guaranteed to receive, plus your interest. When you buy stock in a company, they could go bankrupt and the business shuts down, or the stock will not be worth the price you paid for it. These things do happen, but if you invest with the proper strategies, you will usually come out a winner.
Bonds:
A bond is a debt security in which an issuer owes the bond holder a debt and is supposed to repay the principle and the interest at a later date. The bondholder functions as a lender while the issuer is the borrower. Certain companies offer bonds to invest in. You can also invest in the federal government bond programs. Bonds are a low-risk means to invest in. Bonds A bond is an agreement on a loan between the issuer and the person buying the bond (bondholder). The bondholder has lent a certain amount of money to a government agency, municipality, or corporation and is given interest on the loan. The term of a bond is given a fixed-rate at the time of issue and expires on the specified maturity date. At that time, the issuer is responsible to pay the bondholder the face value of the bond. Throughout the term of the loan, the issuer also pays interest to the bondholder. The interest amount is set when the bond is issued. Bonds can vary in term length. The can be a short as one year or as long as 30 years. Usually, the longer the term on the bond, the better interest rate the bondholder receives. If you choose to sell your bond before the term is up, you can, but you lose money. Its always best to keep bonds for their full term.
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Investing in gold, silver:

Investing in gold is done through ownership or by the means of certificates and shares. One of the traditional ways of investing in gold is through the purchase of gold bars. Swiss banks provide their customers with gold accounts whereby transactions in gold can be done. Investing in mining companies is another option for investing in gold. Investments in silver are similar to those in gold.
Investment in Land and Real Estate:

Real estate investments are done by means of investment in property. Investors purchase property with intent of leasing or holding. Those investing in commercial real estate prefer to purchase a large property and rent it out to big companies. Land investment is an investment activity wherein a piece of land is purchased for development. It can fetch you good and long-term returns if invested wisely. These were some of the different types of investments, which can prove profitable. For any investment to fetch returns, it is necessary to analyze the world economy and individual finances so that you can go for the right option at the right time. Investment advise from a professional always helps. All the best for your future investment ventures. Wish me the same!
Mutual Funds:
It refers to a collective investment scheme in which money pooled from investors is invested in stocks, bonds or other securities. A fund manager is responsible for trading with the pooled money. It is one of the lowest-risk investment ventures. Mutual funds rest on the idea of entrusting an investment expert with your money that he/she invests with intent to fetch you maximum profits.
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Comparative analysis of Exchange Traded Funds and Index funds When investors decide to invest in a mutual fund, then money is put in a pool of money from other investors to create a large portfolio so everyone benefits from bigger profits. Most funds buy a variety of investments like stocks, bonds, or other securities. Because there is such a variety of different investments in one mutual fund, there is not as much of a risk. Usually if one investment has a bad return, another will make up for that loss. To invest in a mutual fund, an investor buys shares of the fund and becomes a shareholder. That fund makes money two ways: by earning dividends or interest on its investments and by selling investments that have grown in price. The fund then pays out its profits to the shareholders.
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UNDERSTANDING MUTUAL FUND

Mutual fund is a trust that pools money from a group of investors (sharing common financial goals) and invest the money thus collected into asset classes that match the stated investment objectives of the scheme. Since the stated investment objectives of a mutual fund scheme generally forms the basis for an investor's decision to contribute money to the pool, a mutual fund can not deviate from its stated objectives at any point of time.
Every Mutual Fund is managed by a fund manager, who using his investment management skills and necessary research works ensures much better return than what an investor can manage on his own. The capital appreciation and other incomes earned from these investments are passed on to the investors (also known as unit holders) in proportion of the number of units they own.
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Comparative analysis of Exchange Traded Funds and Index funds When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the fund in the same proportion as his contribution amount put up with the corpus (the total amount of the fund). Mutual Fund investor is also known as a mutual fund shareholder or a unit holder. Any change in the value of the investments made into capital market instruments (such as shares, debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the market value of the Mutual Fund scheme's assets net of its liabilities. NAV of a scheme is calculated by dividing the market value of scheme's assets by the total number of units issued to the investors.
For example:
A. If the market value of the assets of a fund is Rs. 100,000 B. The total number of units issued to the investors is equal to 10,000. C. Then the NAV of this scheme = (A)/(B), i.e. 100,000/10,000 or 10.00 D. Now if an investor 'X' owns 5 units of this scheme E. Then his total contribution to the fund is Rs. 50 (i.e. Number of units held multiplied by the NAV of the scheme)
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ADVANTAGES OF MUTUAL FUND

Sr. No. Advantage Particulars
Mutual Funds invest in a well-diversified portfolio 1. Portfolio of securities which enables investor to hold a amount of investment is big or small). Fund 2. Professional Management manager works undergoes and has through better various Diversification diversified investment portfolio (whether the
research
investment
management skills which ensure higher returns to the investor than what he can manage on his own. Investors acquire a diversified portfolio of
3.
Less Risk
securities even with a small investment in a Mutual Fund. The risk in a diversified portfolio is lesser than investing in merely 2 or 3 securities. Due to the economies of scale (benefits of larger volumes), mutual funds pay lesser transaction costs. These benefits are passed on to the investors. An investor may not be able to sell some of the
Low 4. Transaction Costs
5.
Liquidity
shares held by him very easily and quickly, whereas units of a mutual fund are far more liquid.
6.
Choice Schemes
of >Mutual funds provide investors with various schemes with different investment objectives.
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Comparative analysis of Exchange Traded Funds and Index funds Investors have the option of investing in a scheme having a correlation between its investment objectives and their own financial goals. These schemes further have different plans/options Funds 7. Transparency provide investors with updated
information pertaining to the markets and the schemes. All material facts are disclosed to investors as required by the regulator. Investors also benefit from the convenience and flexibility offered by Mutual Funds. Investors can switch their holdings from a debt scheme to an
8.
Flexibility
equity
scheme
and
vice-versa.
Option
of
systematic (at regular intervals) investment and withdrawal is also offered to the investors in most open-end schemes. Mutual Fund industry is part of a well-regulated investment environment where the interests of 9. Safety the investors are protected by the regulator. All funds are registered with SEBI and complete transparency is forced.
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Comparative analysis of Exchange Traded Funds and Index funds DISADVANTAGES OF MUTUAL FUND Sr. No.
Disadvantage Particulars
Costs 1. Not Hands
Control in of the an
Investor has to pay investment management fees and fund distribution costs as a percentage of the value of his investments (as long as he holds the units), irrespective of the performance of the fund. The portfolio of securities in which a fund invests is a decision taken by the fund
Investor
2.
No Customized manager. Investors have no right to interfere in Portfolios the decision making process of a fund manager, which some investors find as a constraint in achieving their financial objectives. Many investors find it difficult to select one Difficulty in option from the plethora of Selecting Suitable Scheme a funds/schemes/plans available. For this, they Fund may have to take advice from financial planners in order to invest in the right fund to achieve their objectives.
3.
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TYPES OF MUTUAL FUNDS

General Classification of Mutual Funds 1. Open-end Funds | Closed-end Funds 2. Load Funds | No-load Funds 3. Tax-exempt Funds | Non-Tax-exempt Funds
Open-end Funds:
Funds that can sell and purchase units at any point in time are classified as Open-end Funds. The fund size (corpus) of an openend fund is variable (keeps changing) because of continuous selling (to investors) and repurchases (from the investors) by the fund. An open-end fund is not required to keep selling new units to the investors at all times but is required to always repurchase, when an investor wants to sell his units. The NAV of an open-end fund is calculated every day.
Closed-end Funds:
Funds that can sell a fixed number of units only during the New Fund Offer (NFO) period are known as Closed-end Funds. The corpus of a Closed-end Fund remains unchanged at all times. After the closure of the offer, buying and redemption of units by the investors directly from the Funds is not allowed. However, to protect the interests of the investors, SEBI provides investors with two avenues to liquidate their positions: 1. Closed-end Funds are listed on the stock exchanges where investors can buy/sell units from/to each other. The trading is generally done at a discount to the NAV of the scheme. The
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Comparative analysis of Exchange Traded Funds and Index funds NAV of a closed-end fund is computed on a weekly basis (updated every Thursday).
Load Funds:
Mutual Funds incur various expenses on marketing, distribution, e unit holders. In this case, the corpus of the Fund and its outstanding units do get changed. advertising, portfolio churning, fund manager's salary etc. Many funds recover these expenses from the investors in the form of load. These funds are known as Load Funds. A load fund may impose following types of loads on the investors: 1. Entry Load - Also known as Front-end load, it refers to the load charged to an investor at the time of his entry into a scheme. Entry load is deducted from the investor's contribution amount to the fund. 2. Exit Load - Also known as Back-end load, these charges are imposed on an investor when he redeems his units (exits from the scheme). Exit load is deducted from the redemption proceeds to an outgoing investor. 3. Deferred Load - Deferred load is charged to the scheme over a period of time. 4. Contingent Deferred Sales Charge (CDSC) - In some schemes, the percentage of exit load reduces as the investor stays longer with the fund. This type of load is known as Contingent Deferred Sales Charge.
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No-load Funds:
All those funds that do not charge any of the above mentioned loads are known as No-load Funds.
Tax-exempt Funds:
Funds that invest in securities free from tax are known as Taxexempt Funds. All open-end equity oriented funds are exempt from distribution tax (tax for distributing income to investors). Long term capital gains and dividend income in the hands of investors are taxfree.
Non-Tax-exempt Funds:
Funds that invest in taxable securities are known as Non-Taxexempt Funds. In India, all funds, except open-end equity oriented funds are liable to pay tax on distribution income. Profits arising out of sale of units by an investor within 12 months of purchase are categorized as short-term capital gains, which are taxable. Sale of units of an equity oriented fund is subject to Securities Transaction Tax (STT). STT is deducted from the redemption proceeds to an investor.
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BROAD MUTUAL FUND TYPES
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Comparative analysis of Exchange Traded Funds and Index funds 1. Equity Funds: Equity funds are considered to be the more risky funds as compared to other fund types, but they also provide higher returns than other funds. It is advisable that an investor looking to invest in an equity fund should invest for long term i.e. for 3 years or more. There are different types of equity funds each falling into different risk bracket. In the order of decreasing risk level, there are following types of equity funds: a. Aggressive Growth Funds - In Aggressive Growth Funds, fund managers aspire for maximum capital appreciation and invest in less researched shares of speculative nature. Because of these speculative investments Aggressive Growth Funds become more volatile and thus, are prone to higher risk than other equity funds. b. Growth Funds - Growth Funds also invest for capital appreciation (with time horizon of 3 to 5 years) but they are different from Aggressive Growth Funds in the sense that they invest in companies that are expected to outperform the market in the future. Without entirely adopting speculative strategies, Growth Funds invest in those companies that are expected to post above average earnings in the future. c. Speciality Funds - Speciality Funds have stated criteria for investments and their portfolio comprises of only those companies that meet their criteria. Criteria for some speciality funds could be to invest/not to invest in particular regions/companies. Speciality funds are concentrated and thus, are comparatively riskier than diversified funds.. There are following types of speciality funds:
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Comparative analysis of Exchange Traded Funds and Index funds I. Foreign Securities Funds: Foreign Securities Equity Funds have the option to invest in one or more foreign companies. Foreign securities funds achieve international diversification and hence they are less risky than sector funds. However, foreign securities funds are exposed to foreign exchange rate risk and country risk. II. Mid-Cap or Small-Cap Funds: Funds that invest in companies having lower market capitalization than large capitalization companies are called Mid-Cap or SmallCap Funds. Market capitalization of Mid-Cap companies is less than that of big, blue chip companies (less than Rs. 2500 crores but more than Rs. 500 crores) and Small-Cap companies have market capitalization of less than Rs. 500 crores. Market Capitalization of a company can be calculated by multiplying the market price of the company's share by the total number of its outstanding shares in the market. The shares of Mid-Cap or SmallCap Companies are not as liquid as of Large-Cap Companies which gives rise to volatility in share prices of these companies and consequently, investment gets risky. III. Option Income Funds: While not yet available in India, Option Income Funds write options on a large fraction of their portfolio. Proper use of options can help to reduce volatility, which is otherwise considered as a risky instrument. These funds invest in big, high dividend yielding companies, and then sell options against their stock positions, which generate stable income for investors.
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Comparative analysis of Exchange Traded Funds and Index funds d. Diversified Equity Funds - Except for a small portion of investment in liquid money market, diversified equity funds invest mainly in equities without any concentration on a particular sector(s). These funds are well diversified and reduce sector-specific or company-specific risk. However, like all other funds diversified equity funds too are exposed to equity market risk. One prominent type of diversified equity fund in India is Equity Linked Savings Schemes (ELSS). As per the mandate, a minimum of 90% of investments by ELSS should be in equities at all times. ELSS investors are eligible to claim deduction from taxable income (up to Rs 1 lakh) at the time of filing the income tax return. ELSS usually has a lock-in period and in case of any redemption by the investor before the expiry of the lock-in period makes him liable to pay income tax on such income(s) for which he may have received any tax exemption(s) in the past. e. Equity Index Funds - Equity Index Funds have the objective to match the performance of a specific stock market index. The portfolio of these funds comprises of the same companies that form the index and is constituted in the same proportion as the index. Equity index funds that follow broad indices (like S&P CNX Nifty, Sensex) are less risky than equity index funds that follow narrow sectoral indices (like BSEBANKEX or CNX Bank Index etc). Narrow indices are less diversified and therefore, are more risky. f. Value Funds - Value Funds invest in those companies that have sound fundamentals and whose share prices are currently under-valued. The portfolio of these funds comprises of shares that are trading at a low Price to Earning Ratio (Market Price per Share / Earning per Share) and a low
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Comparative analysis of Exchange Traded Funds and Index funds Market to Book Value (Fundamental Value) Ratio. Value Funds may select companies from diversified sectors and are exposed to lower risk level as compared to growth funds or speciality funds. Value stocks are generally from cyclical industries (such as cement, steel, sugar etc.) which make them volatile in the short-term. Therefore, it is advisable to invest in Value funds with a long-term time horizon as risk in the long term, to a large extent, is reduced. g. Equity Income or Dividend Yield Funds - The objective of Equity Income or Dividend Yield Equity Funds is to generate high recurring income and steady capital appreciation for investors by investing in those companies which issue high dividends (such as Power or Utility companies whose share prices fluctuate comparatively lesser than other companies' share prices). Equity Income or Dividend Yield Equity Funds are generally exposed to the lowest risk level as compared to other equity funds.
2. Debt / Income Funds:

Funds that invest in medium to long-term debt instruments issued by private companies, banks, financial institutions, governments and other entities belonging to various sectors (like infrastructure companies etc.) are known as Debt / Income Funds. Debt funds are low risk profile funds that seek to generate fixed current income (and not capital appreciation) to investors. In order to ensure regular income to investors, debt (or income) funds distribute large fraction of their surplus to investors. Although debt securities are generally less risky than equities, they are subject to credit
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Comparative analysis of Exchange Traded Funds and Index funds risk (risk of default) by the issuer at the time of interest or principal payment. To minimize the risk of default, debt funds usually invest in securities from issuers who are rated by credit rating agencies and are considered to be of "Investment Grade". Debt funds that target high returns are more risky. Based on different investment objectives, there can be following types of debt funds: I. Diversified Debt Funds - Debt funds that invest in all securities issued by entities belonging to all sectors of the market are known as diversified debt funds. The best feature of diversified debt funds is that investments are properly diversified into all sectors which results in risk reduction. Any loss incurred, on account of default by a debt issuer, is shared by all investors which further reduces risk for an individual investor. II. Focused Debt Funds - Debt funds that invest in all securities issued by entities belonging to all sectors of the market are known as diversified debt funds. The best feature of diversified debt funds is that investments are properly diversified into all sectors which results in risk reduction. Any loss incurred, on account of default by a debt issuer, is shared by all investors which further reduces risk for an individual investor. III. High Yield Debt funds - As we now understand that risk of default is present in all debt funds, and therefore, debt funds generally try to minimize the risk of default by investing in securities issued by only those borrowers who are considered to be of "investment grade". But, High Yield Debt Funds adopt a different strategy and prefer securities issued by those issuers who are considered to be of "below investment
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Comparative analysis of Exchange Traded Funds and Index funds grade". The motive behind adopting this sort of risky strategy is to earn higher interest returns from these issuers. These funds are more volatile and bear higher default risk, although they may earn at times higher returns for investors. IV. Assured Return Funds - Although it is not necessary that a fund will meet its objectives or provide assured returns to investors, but there can be funds that come with a lock-in period and offer assurance of annual returns to investors during the lock-in period. Any shortfall in returns is suffered by the sponsors or the Asset Management Companies (AMCs). These funds are generally debt funds and provide investors with a low-risk investment opportunity. However, the security of investments depends upon the net worth of the guarantor (whose name is specified in advance on the offer document). To safeguard the interests of investors, SEBI permits only those funds to offer assured return schemes whose sponsors have adequate net-worth to guarantee returns in the future. In the past, UTI had offered assured return schemes (i.e. Monthly Income Plans of UTI) that assured specified returns to investors in the future. UTI was not able to fulfill its promises and faced large shortfalls in returns. Eventually, government had to intervene and took over UTI's payment obligations on itself. Currently, no AMC in India offers assured return schemes to investors, though possible. V. Fixed Term Plan Series - Fixed Term Plan Series usually are closed-end schemes having short term maturity period (of less than one year) that offer a series of plans and issue units to investors at regular intervals. Unlike closed-end funds, fixed term plans are not listed on the exchanges. Fixed term plan series usually invest in debt / income schemes and target
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Comparative analysis of Exchange Traded Funds and Index funds short-term investors. The objective returns in a short period. of fixed term plan
schemes is to gratify investors by generating some expected
3. Gilt Funds
Also known as Government Securities in India, Gilt Funds invest in government papers (named dated securities) having medium to long term maturity period. Issued by the Government of India, these investments have little credit risk (risk of default) and provide safety of principal to the investors. However, like all debt funds, gilt funds too are exposed to interest rate risk. Interest rates and prices of debt securities are inversely related and any change in the interest rates results in a change in the NAV of debt/gilt funds in an opposite direction.
4. Money Market / Liquid Funds

Money market / liquid funds invest in short-term (maturing within one year) interest bearing debt instruments. These securities are highly liquid and provide safety of investment, thus making money market / liquid funds the safest investment option when compared with other mutual fund types. However, even money market / liquid funds are exposed to the interest rate risk. The typical investment options for liquid funds include Treasury Bills (issued by governments), Commercial papers (issued by companies) and Certificates of Deposit (issued by banks).
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5. Hybrid Funds
As the name suggests, hybrid funds are those funds whose portfolio includes a blend of equities, debts and money market securities. Hybrid funds have an equal proportion of debt and equity in their portfolio. There are following types of hybrid funds in India: I. Balanced Funds - The portfolio of balanced funds include assets like debt securities, convertible securities, and equity and preference shares held in a relatively equal proportion. The objectives of balanced funds are to reward investors with a regular income, moderate capital appreciation and at the same time minimizing the risk of capital erosion. Balanced funds are appropriate for conservative investors having a long term investment horizon. II. Growth-and-Income Funds - Funds that combine features of growth funds and income funds are known as Growth-andIncome Funds. These funds invest in companies having potential for capital appreciation and those known for issuing high dividends. The level of risks involved in these funds is lower than growth funds and higher than income funds. III. Asset Allocation Funds - Mutual funds may invest in financial assets like equity, debt, money market or nonfinancial (physical) assets like real estate, commodities etc.. Asset allocation funds adopt a variable asset allocation strategy that allows fund managers to switch over from one asset class to another at any time depending upon their outlook for specific markets. In other words, fund managers may switch over to equity if they expect equity market to
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Comparative analysis of Exchange Traded Funds and Index funds provide good returns and switch over to debt if they expect debt market to provide better returns. It should be noted that switching over from one asset class to another is a decision taken by the fund manager on the basis of his own judgment and understanding of specific markets, and therefore, the success of these funds depends upon the skill of a fund manager in anticipating market trends.
6. Commodity Funds:
Those funds that focus on investing in different commodities (like metals, food grains, crude oil etc.) or commodity companies or commodity futures contracts are termed as Commodity Funds. A commodity fund that invests in a single commodity or a group of commodities is a specialized commodity fund and a commodity fund that invests in all available commodities is a diversified commodity fund and bears less risk than a specialized commodity fund. "Precious Metals Fund" and Gold Funds (that invest in gold, gold futures or shares of gold mines) are common examples of commodity funds. 7. Real Estate Funds:
Funds that invest directly in real estate or lend to real estate developers or invest in shares/securitized assets of housing finance companies, are known as Specialized Real Estate Funds. The objective of these funds may be to generate regular income for investors or capital appreciation.
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8. Exchange Traded Funds (ETF):
Exchange Traded Funds provide investors with combined benefits of a closed-end and an open-end mutual fund. Exchange Traded Funds follow stock market indices and are traded on stock exchanges like a single stock at index linked prices. The biggest advantage offered by these funds is that they offer diversification, flexibility of holding a single share (tradable at index linked prices) at the same time. Recently introduced in India, these funds are quite popular abroad. 9. Fund of Funds: Mutual funds that do not invest in financial or physical assets, but do invest in other mutual fund schemes offered by different AMCs, are known as Fund of Funds. Fund of Funds maintain a portfolio comprising of units of other mutual fund schemes, just like conventional mutual funds maintain a portfolio comprising of equity/debt/money market instruments or non financial assets. Fund of Funds provide investors with an added advantage of diversifying into different mutual fund schemes with even a small amount of investment, which further helps in diversification of risks. However, the expenses of Fund of Funds are quite high on account of compounding expenses of investments into different mutual fund schemes.
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Risk Hierarchy of Different Mutual Funds:
Thus, different mutual fund schemes are exposed to different levels of risk and investors should know the level of risks associated with these schemes before investing. The graphical representation hereunder provides a clearer picture of the relationship between mutual funds and levels of risk associated with these funds:
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Comparative analysis of Exchange Traded Funds and Index funds An Exchange-Traded Fund (ETF) is an investment company whose shares are traded intra-day on stock exchanges at marketdetermined prices. ETFs enable investors to buy or sell shares on the collective performance of a stock or bond portfolio. ETF is an innovative product which puts together favorable characteristics of open-ended and closed-ended mutual funds and presents a more flexible and liquid product for investors. Over the past decade, demand for ETFs has grown markedly as investorsboth institutional and retailincreasingly turn to them as investment options in their portfolios. With the increase in demand, sponsors have offered more ETFs with a greater variety of investment objectives. While ETFs share some basic characteristics with mutual funds, there remain key operational and structural differences between the two types of investment products. An ETF is an investment company, typically a mutual fund or unit investment trust, whose shares are traded intraday on stock exchanges at market-determined prices. Investors may buy or sell ETF shares through a broker just as they would buy the shares of any publicly traded company. ETFs are just what their name implies: baskets of securities that are traded, like individual stocks, on an exchange. Unlike regular open-end mutual funds, ETFs can be bought and sold throughout the trading day like any other stock. An Index Fund is a Mutual Fund that aims to replicate the movements of an index of a specific financial market. An Index Fund follows a passive investing strategy called Indexing. It involves tracking an index say for example, the Sensex or the Nifty and builds a portfolio with the same stocks in the same proportions as the index. The Fund makes no effort to beat the index and in fact it merely tries to earn the same return. In India, NIFTY BeES is the first-ever ETF launched in India on 8/1/2002 by Benchmark Funds.
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Comparative analysis of Exchange Traded Funds and Index funds On 20th May 2009, Benchmark NIFTY Junior BeESrecorded its highest trading volume on the NSE with over a million units traded on the exchange which dispels the myth that ETFs are traded in low volume and its difficult to buy and sell large quantities. Benchmark asset Management Company created one more milestone in Indian ETF industry by starting one and only ETF available in the world i.e. Liquid BeES (Liquid ETF). In India, ETFs are slowly gaining popularity with the introduction of different schemes by more than 8 Mutual Fund Houses with Rs. 23,968.934 crores Assets Under Management (AUM) as on March 2010. Investors are now realizing the benefits of ETFs and have started to invest in and find value in ETFs and Index Based Fund
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OBJECTIVES OF THE STUDY

1. To study the concept behind ETF and Index funds. 2. To study the comparison between ETF and Index funds. 3. To find out the trends and progress of ETF and Index funds in India. 4. To evaluate the performance and risk & return analysis of ETFs vis--visIndex funds in India.
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NEED FOR THE STUDY

Exchange-Traded Funds constitute the most recent innovation in global capital markets. These funds aim at enhancing investors' participation effectiveness by and providing considerable ETFs benefits are like costlisted risk-diversification. publicly
securities, tracking the performance of the stock basket of the index against which their investments are benchmarked. In plain words, ETFs are the hybrid product of both Mutual Funds and normal stocks so that these funds will have the qualities of both. ETFs gained rapid popularity in the US and Canada during the 1990s and underwent a phenomenal growth since the years of the Dot Com bubble, internationally. According to the US Investment Company Institute, the total value of assets managed by US ETFs alone in January 2009 was almost half a trillion ($495,379 billion) US dollars while the recent years have witnessed a prolific expansion of ETF-trading in European and Asian capital markets. In view of the above developments, research in finance exhibits a surging interest in this area, with an increasing number of studies focusing on the examination of ETFs. Growth of ETFs in India was very less than USA, Canada. But there is a huge scope for growth in India because of its advantages over Index Funds. Therefore, the present study aims at making a performance evaluation of ETFs vis--vis Index funds in order to know the barriers for the growth of the ETFs in India.
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Research methodology
Data Collection: The study is based on secondary data. The Secondary data sources include Fact sheets of Mutual funds, articles, newspapers, SEBI manuals, AMFI reports, journals, books,magazines and websites. Period of the Study: The study covers a period of five years from 2005 to 2009 for the purpose of evaluating the performance of select Exchange Traded Funds and Index Funds in India. However, for the purpose of analyzing the trends and progress of Index funds and ETFs in India, the data are collected since inception viz., 1998 and 2002 respectively. Sample Size: There are 19 ETF schemes (including 7 Gold ETFs) and 24 Index Funds in India. Out of which, data with regard to all the parameters selected for the evaluation of performance were available only for 10 ETF schemes and 19 Index funds which were operating between the period of 2005 2009. Hence, the study is made only for these funds. The parameters for evaluating the performance are Net Asset Value, Risk, Return, Expenses Ratio, Tracking Error, Reward to Variability (Sharpe) and Differential Return (Alpha). Statistical Techniques: The data are analyzed with the help of statistical tools like Standard Deviation, Sharpe Ratio, Alpha, R-Squared and Beta.
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ALL ABOUT EXCHANGE TRADED FUNDS

Exchange Traded ETFs are just what their name implies: baskets of securities that are traded, like individual stocks, on an exchange. Unlike regular openend mutual funds, ETFs can be bought and sold throughout the trading day like any stock. on an exchange. Unlike regular open-end mutual funds, ETFs can be bought and sold throughout the trading day like any stock. Most ETFs charge lower annual expenses than index mutual funds. However, as with stocks, one must pay a brokerage to buy and sell ETF units, which can be a significant drawback for those who trade frequently or invest regular sums of money. They first came into existence in the USA in 1993. It took several years for them to attract public interest. But once they did, the volumes took off with a vengeance. Over the last few years more than $120 billion (as on June 2002) is invested in about 230 ETFs. About 60% of trading volumes on the American Stock Exchange are from ETFs. The most popular ETFs are QQQs (Cubes) based on the Nasdaq-100 Index, SPDRs (Spiders) based on the S&P 500 Index, iSHARES based on MSCI Indices and TRAHK (Tracks) based on the Hang Seng Index. The average daily trading volume in QQQ is around 89 million shares. Their passive nature is a necessity: the funds rely on an arbitrage mechanism to keep the prices at which they trade roughly in line with the net asset values of their underlying portfolios. For the mechanism to work, potential arbitragers need to have full, timely knowledge of a fund's holdings.
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Comparative analysis of Exchange Traded Funds and Index funds An exchange traded fund (ETF) is an investment product - similar to a mutual fund - that trades on a stock exchange. Most ETFs track major stock indices or industry sub-sectors, which allows investors to get exposure to either the entire market or specific sectors with a single purchase. Unlike a mutual fund, an ETF's holdings - the investments it makes - are always known (its components are simply the weighted components of the index it tracks). While mutual funds often aim to "beat" the market or the sector they track, ETFs usually aim only to track the market and match its performance, good or bad. As a result, ETFs often charge lower fees than mutual funds, and are known as inexpensive ways for investors to invest in the market as a whole or specific sub-sectors. ETFs also have lower expense ratios because they are not actively managed. In most cases, this results in lower management fees and lower turnover costs. There are some other mechanical differences between mutual funds and ETFs with regards to how they are traded. Mutual funds are quoted shortly after the end of each trading session (and only get one NAV price per day). On the other hand, ETFs are traded more like a traditional stock which can be bought and sold during normal market hours as well as in the pre-market and after-hours sessions (note - some ETFs trade 15 minutes beyond normal market hours). Exchange traded funds hold a pool of assets, the total value of which is divided into proportional shares which are bought and sold by investors via a stock exchange. This provides a very easy way for the average investor to get a specific set of equities without the overhead of purchasing eachequity separately. For example, if an investor wanted to invest Rs.50000 in all the companies in the NIFTY index it would be impractical for him to put such a (relatively) small amount to so many securities. However, by buying shares in
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Comparative analysis of Exchange Traded Funds and Index funds an ETF that tracks the NIFTY Index, one could gain this exposure at a reasonable rate. Though commonly associated with stock indices, ETFs can hold any type of asset, including stocks, bonds, futures, currencies, or even tangible commodities such as gold bars. This flexibility affords ETF investors exposure not just to broad swaths of stocks, but entire classes of investment that may otherwise be unreasonable; the average investor, for example, may not have the risk tolerance or capital to invest in oil futures, but she could easily invest in an oil ETF that tracks those futures prices. Like mutual funds, ETFs are priced proportionately to the value of the underlying equities it represents. In essence, the fund takes the value of the whole pie and slices it into equal shares. Each share necessarily has the same value. However, unlike mutual funds, which calculate a Net Asset Value at the end of every day, the value of the ETF changes throughout the trading day based on supply and demand from investors - just like a stock, an ETF is subject to the Bid/Ask Spread. The makeup of the 'basket' that a given ETF represents is determined when the ETF is established, and cannot change. The issuers and managers of the ETF (called sponsors) are paid a management fee from the fund itself. Though typically small, the amount of the fee varies between funds and may have a significant effect on the difference in value between the fund and it's underlying assets. ETFs are built on sound corporate governance principles: Board of Directors, Compensated management, highly detailed record keeping and audit requirements.
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Comparative analysis of Exchange Traded Funds and Index funds Like Mutual Funds, ETFs are regulated by the SEBI under the Companies Act of 1956.
Characteristics of ETFs
Many ETFs have the key benefit of relatively low expense ratios. Because ETFs follow a set of predetermined rules, there is no research team or expensive fund manager to pay to make active decisions about the contents of the fund. Thus, ETFs are passively managed funds. (Note the bid-ask spread on your ETF at purchase: long-term investors can focus on the expense ratio alone, whereas actively trading investors may wish to consider the premium they're paying for a less-liquid ETF ) ETFs are more portable than most mutual funds. Portability allows an individual investor to switch financial advisors without incurring the tax cost and transaction costs of selling and buying proprietary mutual funds. Practically all advisor platforms handle ETFs since they trade identically to individual stocks. ETFs pass through dividends to investors. Some declare capital gains but most don't. Both open-end and closed-end mutual funds are required by law to either declare at least 95% of capital gains and dividends each year or pay taxes on the gains themselves. Investing in ETFs that don't declare capital gains provides a tax advantage to the investor compared to investing in mutual funds.
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Kinds of ETFs:
Equity ETFs are funds that hold equities and track an equity index.
Fixed Income ETFs are funds that hold fixed income instruments like corporate bonds, muni bonds, etc.
Leveraged/Inverse ETFs A leveraged ETF attempts to achieve returns that are sensitive to market movements. An inverse ETF is designed to perform as the inverse of an index or benchmark. Leveraged and Inverse ETFs are trading tools that give retail investors the ability to carry out sophisticated trades like hedging and shorting which were traditionally only available to large institutional investors allowing for 2x, 3x or , -1x, -2x, -3x daily performance on a certain index.
Alternatively Weighted ETFs are funds that do not follow a traditional market cap weighting, where the weight of each holding is based on their relative market capitalization, but rather are weighted based on other "fundamentals" like revenue, dividends, etc.
International ETFs are a way for investors to diversify internationally. Many mutual funds are benchmarked against similar US indexes.
By using ETFs to access international equities, investors also gain the flexibility of using these freely traded securities, to enter and exit the international markets By using ETFs to access international equities, investors also gain the flexibility of using these freely traded securities, to enter and exit the international markets at times when they aren't open. There are hidden costs associated with this "artificial" liquidity that are built into the cost of the ETF
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Comparative analysis of Exchange Traded Funds and Index funds share itself. Finally, US investors are able to enter and exit positions in international equities using only US dollars. There are no conversion fees incurred by first trading currency into the local market currency before investing. Regardless of the currency used for the underlying basket of international equities, the ETF is priced in US dollars. Commodities ETFs hold a commodity as their underlying asset, allowing an investor to invest in the commodity. For example, a gold ETF would have physical stockpiles of gold proportional to the value of its outstanding shares. Several ETF fund families such as Power Shares and Adelante Shares have brought out shares which correlate to the price of individual commodities or baskets, such as the PowerShares DB Agricultural Fund (DBA) which reflects the prices of four of the most widely traded agricultural commodities: corn, wheat, soybeans and sugar. Other Commodity ETF's include Real Estate ETFs - REITs and Currency ETFs. Index ETFs public indexes as benchmarks to invest the money to meet objectives, such as current income or capital appreciation. Index ETFs are similar to traditional index mutual funds that allow investors to trade a portfolio of securities in a single transaction.
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Advantages of ETFs
While many investors have similar outlooks, no two are exactly alike. Due to the unique structure of ETFs, all types of investors, whether retail or institutional, long-term or short-term, can use it to their advantage without being at a disadvantage to others. They allow long-term investors to diversify their portfolio at one shot at low cost and insulate them from short-term trading activity due to the unique in-kind creation / redemption process. They provide liquidity for investors with a shorter-term horizon as they can trade intra-day and can have quotes near NAV during the course of trading day. As initial investment is low, retail investors find it simple and convenient to buy / sell. They facilitate FIIs, Institutions and Mutual Funds to have easy asset allocation, hedging, and equitizing cash at a low cost. They enable arbitrageurs to carry out arbitrage between the Cash and the Futures markets at low impact cost. ETFs provide exposure to an index or a basket of securities that trade on the exchange like a single stock. They offer a number of advantages over traditional open-ended index funds as follows:
While redemptions of Index fund units takes place at a fixed NAV price (usually end of day), ETFs offer the convenience of intra-day purchase and sale on the Exchange, to take advantage of the prevailing price, which is close to the actual NAV of the scheme at any point in time.
They provide investors a fund that closely tracks the performance of an index throughout the day with the ability to buy/sell at any time, whereby trading opportunities that arise during a day may be better utilized.
They are of low cost.
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Unlike listed closed-ended funds, which trade at substantial premia or more frequently at discounts to NAV, ETFs are structured in a manner which allows Authorized Participants and Large Institutions to create new units and redeem outstanding units directly with the fund, thereby ensuring that ETFs trade close to their actual NAVs.
ETFs are like any other index fund, wherein, subscription / redemption of units work on the concept of exchange with underlying securities instead of cash (for large deals).
Since an ETF is listed on an Exchange, costs of distribution are much lower and the reach is wider. These savings in cost are passed on to the investors in the form of lower costs. Further, the structure helps reduce collection, disbursement and other processing charges.
ETFs protect long-term investors from inflows and outflows of short-term investors. This is because the fund does not incur extra transaction cost for buying/selling the index shares due to frequent subscriptions and redemptions.
Tracking error, which is divergence between the NAV of the ETF and the underlying Index, is generally observed to be low as compared to a normal index fund due to lower expenses and the unique in-kind creation / redemption process.
ETFs are highly flexible and can be used as a tool for gaining instant exposure to the equity markets, equitizing cash or for arbitraging between the cash and futures market.
The first ETF in India, Nifty BeEs (Nifty Benchmark Exchange Traded Scheme) based on S&P CNX Nifty was launched in January 2002 by Benchmark Mutual Fund. It may be bought and sold like any other stock on NSE. Its symbol on NSE is NIFTYBEES.
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Creations & Redemptions

ETFs are different from Mutual funds in the sense that ETF units are not sold to the public for cash. Instead, the Asset Management Company that sponsors the ETF (Fund) takes the shares of companies investors comprising like the index from various large categories investors of and authorized participants,
institutions. In turn, it issues them a large block of ETF units. Since dividend may have accumulated for the stocks at any point in time, a cash component to that extent is also taken from such investors. In other words, a large block of ETF units called a "Creation Unit" is exchanged for a "Portfolio Deposit" of stocks and "Cash Component The number of outstanding ETF units is not limited, as with traditional mutual funds. It may increase if investors deposit shares to create ETF units; or it may reduce on a day if some ETF holders redeem their ETF units for the underlying shares. These transactions are conducted by sending creation / redemption instructions to the Fund. The Portfolio Deposit closely approximates the proportion of the stocks in the index together with a specified amount of Cash Component. This in-kind creation / redemption facility ensures that ETFs trade close to their fair value at any given time. Some investors may prefer to hold the creation units in their portfolios. While others may break-up the creation units and sell on the exchanges, where individual investors may purchase them just like any other shares.
ETF units are continuously created and redeemed based on investor demand. Investors may use ETFs for investment, trading or arbitrage. The price of the ETF tracks the value of the underlying
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Comparative analysis of Exchange Traded Funds and Index funds index. This provides an opportunity to investors to compare the value of underlying index against the price of the ETF units prevailing on the Exchange. If the value of the underlying index is higher than the price of the ETF, the investors may redeem the units to the Sponsor in exchange for the higher priced securities. Conversely, if the price of the underlying securities is lower than the ETF, the investors may create ETF units by depositing the lowerpriced securities. This arbitrage mechanism eliminates the problem associated with closed-end mutual funds viz. the premium or discount to the NAV.
Applications of ETFs
Efficient Trading: ETFs provide investors a convenient way to gain market exposure viz. an index that trades like a stock. In comparison to a stock, an investment in an ETF index product provides a diversified exposure to the market. Depending on the index, investors may obtain exposure to countries/ markets or sectors.
EquitisingCash: Investors with idle cash in their portfolios may want to invest in a product tied to a market benchmark like an index as a temporary investment before deciding which stocks to buy or waiting for the right price.
Managing Cash Flows: Investment managers who see regular inflows and outflows may use ETFs because of their liquidity and their ability to represent the market.
Diversifying Exposure: If an investor is not sure about which particular stock to buy but likes the overall sector,
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Comparative analysis of Exchange Traded Funds and Index funds investing in shares tied to an index or basket of stocks provides diversified exposure and reduces stock specific risk.
Filling Gaps: ETFs tied to a sector or industry may be used to gain exposure to new and important sectors. Such strategies may also be used to reduce an overweight or increase an underweight sector.
Shorting or Hedging: Investors who have a negative view on a market segment or specific sector may want to establish a short position to capitalize on that view. ETFs may be sold short against long stock holdings as a hedge against a decline in the market or specific sector.
Comparison of ETFs with other mutual funds

In essence, ETFs trade like stocks and therefore offer a degree of flexibility unavailable with traditional mutual funds. Specifically, investors can trade ETFs throughout the trading day as in stocks. In comparison, in a traditional mutual fund, investors can purchase units only at the funds NAV, which is published at the end of each trading day. In fact, investors cannot purchase ETFs at the closing NAV. This difference gives rise to an important advantage of ETFs over traditional funds: ETFs are immediately tradable and consequently, the risk of price differential between the time of investment and time of trade is substantially less in the case of ETFs. ETFs are cheaper than traditional mutual funds and index funds in terms of fees. However, while investing in an ETF, an investor pays a commission to the broker. The tracking error of ETFs is generally lower than traditional index funds due to the in-kind creation /
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Comparative analysis of Exchange Traded Funds and Index funds redemption facility and the low expense ratio. This in-kind creation / redemption facility ensures that long-term investors do not suffer at the cost of short-term investor activity.
ETFs can be bought / sold through trading terminals anywhere across the country. Table No. 1 presents a comparative view ETFs vis--vis other funds.
ETFs Vs. Open Ended Funds Vs. Close Ended Funds

Parameter Fund Size NAV Liquidity Provider Sale Price Availability Portfolio Disclosure Uses Intra-Day Trading Open Ended Fund Flexible Daily Fund itself At NAV plus load, if any Fund itself Monthly Equitising cash Not possible Closed Ended Fund Fixed Daily Stock Market Significant Premium / Discount to NAV Through Exchange where listed Monthly Expensive Exchange Traded Fund Flexible Real Time Stock Market / Fund itself Very close to actual NAV of Scheme Through Exchange where listed / Fund itself. Daily/Real-time Equitising Cash, Hedging, Arbitrage Possible at low cost
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Structure of ETF
ETFs offer public investors an undivided interest in a pool of securities and other assets and thus are similar in many ways to traditional mutual funds, except that shares in an ETF can be bought and sold throughout the day like stocks on a securities exchange through a broker-dealer. Unlike traditional mutual funds, ETFs do not sell or redeem their individual shares at net asset value, or NAV. Instead, financial institutions purchase and redeem ETF shares directly from the ETF, but only in large blocks, varying in size by ETF from 25,000 to 200,000 shares, called "creation units". Purchases and redemptions of the creation units generally are in kind, with the institutional investor contributing or receiving a basket of securities of the same type and proportion held by the ETF, although some ETFs may require or permit a purchasing or redeeming shareholder to substitute cash for some or all of the securities in the basket of assets. The ability to purchase and redeem creation units gives ETFs an arbitrage mechanism intended to minimize the potential deviation between the market price and the net asset value of ETF shares. Existing ETFs have transparent portfolios, so institutional investors will know exactly what portfolio assets they must assemble if they wish to purchase a creation unit, and the exchange disseminates the updated net asset value of the shares throughout the trading day, typically at 15-second intervals. If there is strong investor demand for an ETF, its share price will (temporarily) rise above its net asset value per share, giving arbitrageurs an incentive to purchase additional creation units from the ETF and sell the component ETF shares in the open market. The additional supply of ETF shares increases the ETF's market capitalization and reduces the market price per share, generally
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Comparative analysis of Exchange Traded Funds and Index funds eliminating the premium over net asset value. A similar process applies when there is weak demand for an ETF and its shares trade at a discount from net asset value. In the United States, most ETFs are structured as open-end management investment companies (the same structure used by mutual funds and money market funds), although a few ETFs, including some of the largest ones, are structured as unit investment trusts. ETFs structured as open-end funds have greater flexibility in constructing a portfolio and are not prohibited from participating in securities lending programs or from using futures and options in achieving their investment objectives. Under existing regulations, a new ETF must receive an order from the Securities and Exchange Commission, or SEC, giving it relief from provisions of the Investment Company Act of 1940 that would not otherwise allow the ETF structure. In 2008, however, the SEC proposed rules that would allow the creation of ETFs without the need for exemptive orders. Under the SEC proposal, an ETF would be defined as a registered open-end management investment company that:
Issues (or redeems) creation units in exchange for the deposit (or delivery) of basket assets the current value of which is disseminated on a per share basis by a national securities exchange at regular intervals during the trading day;
Identifies itself as an ETF in any sales literature; Issues shares that are approved for listing and trading on a securities exchange;
Discloses each business day on its publicly available web site the prior business day's net asset value and closing market price of the fund's shares, and the premium or discount of the
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Comparative analysis of Exchange Traded Funds and Index funds closing market price against the net asset value of the fund's shares as a percentage of net asset value; and
Either is an index fund, or discloses each business day on its publicly available web site the identities and weighting of the component securities and other assets held by the fund.
The SEC rule proposal would allow ETFs either to be index funds or to be fully transparent actively managed funds. Historically, all ETFs in the United States have been index funds. In 2008, however, the SEC began issuing exemptive orders to fully transparent actively managed ETFs. The first such order was to Power Shares Actively Managed Exchange-Traded Fund Trust, and the first actively managed ETF in the United States was the Bear Stearns Current Yield Fund, a short-term income fund that began trading on the American Stock Exchange under the symbol YYY on 25 March 2008. The SEC rule proposal indicates that the SEC may still consider future applications for exemptive orders for actively managed ETFs that do not satisfy the proposed rule's transparency requirements. Some ETFs invest primarily in commodities or commodity-based instruments, such as crude oil and precious metals. Although these commodity ETFs are similar in practice to ETFs that invest in securities, they are not "investment companies" under the Investment Company Act of 1940. Publicly traded grantor trusts, such as Merrill Lynch's HOLDRs securities, are sometimes considered to be ETFs, although they lack many of the characteristics of other ETFs. Investors in a grantor trust have a direct interest in the underlying basket of securities, which does not change except to reflect corporate actions such as stock splits and mergers. Funds of this type are not "investment companies" under the Investment Company Act of 1940.
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Comparative analysis of Exchange Traded Funds and Index funds As of 2009, there were approximately 1,500 exchange-traded funds traded on US exchanges. This count uses the wider definition of ETF, including HOLDRs and closed-end funds.
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Comparative analysis of Exchange Traded Funds and Index funds ETFs Launched on NSE
World Indices
o
Hang SengBeES
Equity
o o o o o o
Nifty BeES Junior Nifty BeES Bank BeES PSUBNKBEES SHARIABEES S&P CNX Nifty UTI Notional Depository Reciepts Scheme (SUNDER)
o o o o o o o
KOTAKPSUBK RELBANK QNIFTY KOTAK NIFTY M50 INFRABEES M100
Liquid
o
Liquid Benchmark Exchange Traded Scheme (Liquid BeES)
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GOLD ETF
o o o o o o o o o o
GOLDBEES GOLDSHARE KOTAKGOLD RELGOLD QUANTUMGOLD SBIGETS RELIGAREGOLD HDFCMFGETF | HDFC GOLD Information ICICI Prudential Gold ETF | IPGETF Axis Gold ETF
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Comparative analysis of Exchange Traded Funds and Index funds All about INDEX Funds: An index fund is a mutual fund that aims to replicate the movements of an index of a specific financial market. An Index fund follows a passive investing strategy called indexing. It involves tracking an index say for example, the Sensex or the Nifty. And builds a portfolio with the same stocks in the same proportions as the index. The fund makes no effort to beat the index and in fact it merely tries to earn the same return. A passively managed mutual fund that tries to mirror the
performance of a specific index, such as the NIFTY. Since portfoliodecisions are automatic and transactions are infrequent, expenses tend to be lower than those of actively managed funds. A mutual fund that has as its primary objective the matching of the performance of a particular stock index such as the NIFTY index. The beauty of index funds is twofold: 1. They minimize costs. All the fund company has to do is construct a portfolio out of the stocks in a chosen index. The fund is passively managed, with changes being made only to fine-tune the fund's performance to match more closely the index's results. The alternative is an actively managed fund, which even sounds more expensive. 2. The index funds eliminate your need to work so hard and worry too much. You can be fairly assured that your performance will be as good-or as bad-as the overall performance of the market or markets you select. A drawback to index funds is that since the index is made up of the stocks of large, well-known, and highly regarded companies, they
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Comparative analysis of Exchange Traded Funds and Index funds can miss out on the opportunity of superior stock-price appreciation that some small companies often provide.
Origin of INDEX Funds

Index funds first came into being in the US in the 1970s. In the US the research established the efficient markets concept which says that stocks are mostly priced accurately and that it is not possible to beat the market in a systematic way. Though a few actively managed mutual funds may beat the market for a while, it is very rare for active funds to beat the market in the long run.
INDEX Funds in the context of India

In the Indian market scenario index funds may not be the best option. The basic principle of indexing is - the more the number of stocks comprising an index the better is the diversification and price discovery. Indian indices like the Sensex (30) and the Nifty (50) cover a relatively small number of stocks and ignore many opportunities in the mid-cap sector. Also, unlike the capital markets in developed countries, Indian markets haven't been thoroughly researched and there is enormous scope to beat the market by sound research.
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CHARACTERISTICS OF INDEX FUNDS
1. Index funds are mutual funds that endeavor to track/replicate the constituents of the target index. 2. Index Funds generally hold securities in the same proportion as the target index. 3. Index Funds are passively managed funds. 4. There is no active selection of stocks by the Fund Manager. 5. The portfolio is rebalanced periodically only when companies enter/exit the index. 6. The expense ratio of index funds are generally less than actively managed equity funds. 7. Index funds in India, generally track S&P CNX Nifty & BSE Sensex Indices.
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Advantages of INDEX Funds
As per efficient markets concept index funds provide optimum returns in the long run.
An index fund doesn't have to pay for expensive analysts and frequent trading.
Index funds track a broad index which is less volatile than specific stocks or sectors, thereby lessening the risk for investors. An index fund allows you to enjoy the good parts of a mutual fund, with little or none of the bad, by buying stock in all the companies of a particular index and thereby reproducing the performance of an entire section of the market. An index fund builds its portfolio by simply buying all the stocks in a particular index -- the fund buys the entire stock market, not just a few stocks. The most popular index of stock index funds is the Standard & Poor's 500, NIFTY, SENSEX etc. but there are index funds that track 28 different indexes, and more are added all the time.
An S&P 500 stock index fund owns 500 stocks -- all the companies that are included in the index. This is the key distinction between stock index funds and "actively managed" mutual funds. The manager of a stock index fund doesn't have to worry about which stocks to buy or sell -- he or she only has to buy the stocks that are included in the fund's chosen index. A stock index fund has no need for a team of highly-paid stock analysts and expensive computer equipment that goes into picking stocks for the fund's portfolio. So the hard part about running a mutual fund is gone.
Investing in stock index funds is often called passive investing, since the funds don't use the same active
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Comparative analysis of Exchange Traded Funds and Index funds management techniques as other funds. Passive investing has two big advantages over active investing. First, a passive stock market mutual fund is much cheaper to run than an active fund. Eliminate those analysts' salaries and an index fund can cut its costs tremendously -- and those savings can be passed along to investors in the form of higher returns.
The second main advantage of stock index funds is that they perform better than actively managed funds. Some investors find it incredible when they learn that most mutual funds are flops, at least when it comes to generating returns for their shareholders.
Of course, investing in a stock index fund guarantees that you'll never outperform the overall market, but less than 20 percent of all professional mutual fund managers master that task in any given year. Even armed with this knowledge, some investors are convinced that they can pick out one of the funds that will be in the rare 20 percent club -- easy in theory but actually much harder in practice. If you looked at lists of the top-performing mutual funds for the last several years, you won't likely find many of the same names on more than a few of them. It's not uncommon for a fund to have a "hot" year, but it's very uncommon for a fund to consistently turn in above average performance.
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Disadvantages of INDEX
Many stock indices are based on market capitalization. This means that such indices contain the biggest companies of a certain category. If you invest in such an index you are likely to buy the more expensive stocks. In fact stocks often join such indices after some solid share price gains. These share price gains increase their market capitalization which makes them candidates for indices based on market capitalization. This effect is significant: economic investigator Rob Arnott has found that indices that are not based on market capitalization perform about 2% better than indices based on market capitalization. For this reason he argues that is it better to invest in indices based on fundamentals, such as P/E, price/sales etc. Especially large-cap indices may suffer from index arbitrage. Index funds track a certain index, which means that they only invest in stocks listed in their index. Mutual funds often track a certain index as well, which gives them less flexibility to invest in shares outside their index. Since there are many index funds and mutual funds you could buy a stock just before it is announced that the stock is listed on the index. It can be time consuming and computationally intensive to predict these announcements but it is possible and it happens. After the announcement many mutual funds buy the stock since they have to outperform the index. At the day the stock is actually part of the index, the index funds buy the stock making its price even higher. For the S&P500 researchers Chen, Noronha, and Singal have found that the effect of the announcement accounts for 5% price gain and there is another 8% price gain between the day of the announcement and the actual listing in the index.
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Comparative analysis of Exchange Traded Funds and Index funds Predicting when a stock will be delisted from an index can be beneficial as well. Between the announcement and the delisting the share price of a S&P500 stock goes about 8% down on average. Index funds usually posses such shares untill the day they are actually delisted. My bet is that mid-cap and small-cap index funds do not suffer from this index arbitrage effect. A mid-cap index fund, for example, gets extra gains for stocks that move to a large-cap index. On the other hand a mid-cap index fund buys potentially overvalued stocks of companies that just made it to its mid-cap index. Probably the first effect more than compensates the second effect. So if you want to invest in small-cap and mid-cap indices it is probably better to choose an ETF with weightings based on market capitalization. Index funds that use fundamental weighting of their assets usually have a higher expense ratio than index funds based on market capitalization. Again this can be a reason for investing in an ETF with a weighting based on market-cap, especially if it is a small-cap or a mid-cap ETF.
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Why One Should Invest In Index Funds?

1. Index funds are the simplest of the mutual fund products to understand, even for a layman who just has a vague idea about the equity markets. 2. Provides an opportunity to participate in India growth story by investing in well-diversified portfolio of fundamentally strong, highly liquid, well known companies. 3. Index funds aims to minimize unsystematic risk (risk pertaining to companies, sectors etc) of an investors portfolio to a certain extent. 4. Performance of the portfolio is generally in tune with the performance of the target index: Any variation in performance (known as tracking error) is generally due to the % of cash allocation & expenses of the fund. 5. Lower management fees & lower portfolio turnover makes it cost efficient.
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Comparison Between ETFs and INDEX FUNDS
One question that often comes up when deciding on how to invest is the choice of investment vehicles. If you want to buy low cost investments then index funds and exchange traded funds (ETFs) are the best choices.
An INDEX fund An index fund is a mutual fund that invests in the same stocks that are contained in a stock market index, in the same proportion as the stock index. Imagine a stock index lets call it the ABC index that contains 2 stocks:IBM and Microsoft. Lets say that the ABC index is made up of 60% IBM and 40% Microsoft. If an index fund is based on the ABC index then it too will also invest in IBM and Microsoft 60% of the index fund will be IBM and 40% will be Microsoft. These percentages will change as the values of IBM and Microsoft change. If the price of the IBM stock increases and the price of Microsoft decreases then the index will change so that maybe 65% will be IBM and only 35% will be Microsoft.
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Exchange traded fund:

An exchange traded fund or ETF is an investment that contains the same stocks of a stock market index, in the same proportion as the stock index. If you are thinking this sounds a lot like index funds, you would be correct!
Valuation of index funds and ETFs:

The price of an ETF or index fund is determined by the value of the stocks contained in the underlying index. For example Vanguard VTI is an ETF that covers most of the stocks available in the US. As the price of the underlying stocks change value, the ETF price will also change because investors will bid the ETF shares higher or lower available in the US. As the price of the underlying stocks change value, the ETF price will also change because investors will bid the ETF shares higher or lower.
Comparison between ETF V/S INDEX Funds

Comparing the Advantages: ETFs are flexible investment vehicles: Because ETFs are flexible investment vehicles, they appeal to a broad segment of the investing public. Passive investors and active traders alike find the features of ETFs attractive Passive institutional investors love ETFs for their flexibility:.
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Comparative analysis of Exchange Traded Funds and Index funds Many see them as a great alternative to futures. For example, ETFs can be purchased in smaller sizes. They also don't require special documentation, special accounts, rollover costs or margin. Furthermore, some ETFs cover benchmarks where there are no futures contracts.
Active traders, including hedge funds, love ETFs for their convenience: Because they can be traded as easily as stocks. This means they have margin and trading flexibility that is unmatched by index funds. Ironically, ETFs are exempt from the short sale uptick rule that plagues regular stocks (the short sale uptick rule prevents short sellers from shorting a stock unless the last trade resulted in a price increase).
Passive retail investors, for their part, will love index funds for their simplicity: Investors do not need a brokerage account or deposit with index funds. They can usually be purchased through the investor's bank. This keeps things simple for investors - a consideration that the investment advisory community continues to overlook.
Comparing the Costs ETFs and index funds each have their own particular advantages and disadvantages when it comes to costs associated with index tracking (the ability to track the performance of their respective index) and trading. A direct comparison of how these costs are
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Comparative analysis of Exchange Traded Funds and Index funds handled by ETFs and by index funds would help to make an informed decision when choosing between the two investment vehicles.
The two costs involved are: 1. Tracking Costs. 2. Non-tracking Cost.
1. Tracking Cost The costs involved in tracking an index fall into three main categories. A. Rebalancing cost. B. Cash Drag. C. Dividend Policy.
A. Rebalancing cost: It occurs with index funds because of daily net redemptions results in explicit costs in the form of commissions and implicit costs in the form of bid-ask spreads on the subsequent underlying fund trades. ETFs have a unique process called creation/redemption inkind (meaning shares of ETFs can be created and redeemed with a like basket of securities) that avoids these transaction costs. B. Cash drag - which can be defined for index funds as the cost of holding cash to deal with potential daily net redemptions 63 | P a g e
Comparative analysis of Exchange Traded Funds and Index funds favors ETFs once again. ETFs do not incur this degree of cash drag because of their aforementioned creation/redemption inkind process. C. Dividend policy: It is one area where index funds have a clear advantage over ETFs. Index funds will invest their dividends immediately, whereas the trust nature of ETFs requires them to accumulate this cash during the quarter until it is distributed to shareholders at end-of-quarter. If we were to return to a dividend environment like that seen in the 1960s and '70s, this cost would certainly become a bigger issue. 2. Non-tracking costs: Itcan also be divided into three categories: A. Management fees. B. Shareholder transaction cost. C. Taxation. A. Management fees: These are generally lower for ETFs because the fund is not responsible for the fund accounting (the brokerage company will incur these costs for ETF holders). This is not the case with index funds. B. Shareholder transaction costs: These are usually zero for index funds, but this is not the case for ETFs. In fact, shareholder transaction costs are the biggest factor in determining whether or not ETFs are right for an investor. With ETFs, shareholder transaction costs can be broken
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down
into
commissions
and
bid-ask
spreads.
Comparative analysis of Exchange Traded Funds and Index funds The liquidity of the ETF, which in some cases can be material, will determine the bid-ask spread. C. Taxation: Out of these two investment vehicles it favors ETFs. In nearly all cases, the creation/redemption in-kind feature of ETFs eliminates the need to sell securities - with index mutual funds, it is that need to sell securities that triggers tax events. ETFs can also rid themselves of capital gains inherent in the fund by transferring out the securities with the highest unrealized gains as part of the redemption in-kind process.
Table 2 - A comparative look at the costs associated with index funds and ETFs, with 1 indicating the greatest effect on costs and 4 the least.
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Which Investment to Choose?

Typically, the choice between ETFs and index funds will come down to the most important issues: management fees, shareholder transaction costs, taxation and other qualitative differences. According to the analysis we mentioned earlier by Kostovetsky, a comparison of these costs favors index funds as the choice for most passive retail investors. Kostovetsky's analysis assumes no tracking costs and the more popular indexes. For example, if you were looking at a holding period of one year, you would be required to hold over $60,000 of an ETF for the management fee and taxation savings to offset the transaction costs. With a longer-term time horizon of 10 years, the break-even point would be lowered to $13,000. However, both these limits are usually out of range for the average retail investor.
Major Points of Difference between ETFs & INDEX funds Most investors are better off with index funds for a number of reasons however it really depends on the individual situation. Lets take a look at some of the points of differences between these two investment types first. Exchange Traded Funds ETFs

Lower ongoing management costs (MER). Higher trading fees. Manual orders (i.e. you have to sign in and order each purchase).
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Comparative analysis of Exchange Traded Funds and Index funds Index funds

Higher MERs. No trading fees. Orders can be automated.
Since most investors tend to make purchases on a regular basis, the trading fees on an ETF will quickly eliminate any advantage of the lower MER. This means that index funds are often a cheaper alternative. Another factor is the size of portfolio if the portfolio is large enough then ETFs might make more sense. The MER savings on a larger portfolio might outweigh the higher trading costs. Not all ETFs are cheaper than index funds and trading and annual account fees can vary quite a bit between institutions.
Best solution Most smaller investors (less than $100k) are likely better off with index funds because of the lower trading fees. Larger investors have more choice they can keep going with index funds, or switch to ETFs or perhaps own both. Once you have a large enough portfolio, you can consider having the bulk of your portfolio in ETFs and then make regular contributions into index funds. This way you get the low MERs of ETFs and have cheap trades with index funds.
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Comparative analysis of Exchange Traded Funds and Index funds Differences between ETFs and index funds One of the key differences between index funds and ETFs is that index funds are priced once a day. It doesnt matter what time you put your order in, the price you get will be set at the end of the trading day (4:00pm EST). ETFs on the other hand are priced throughout the day in a similar fashion to stocks. A second key difference is in order to purchase ETFs you have to pay a trading commission like you would with a single company stock. Factors to be considered when deciding between ETFs and INDEX funds
Management expense ratio (MER) This is the basic cost of running an index fund or ETF. You wont see the management fee deducted in any of your statements but you can find out what it is from the investment company website. Generally, ETFs tend to be cheaper than a similar index funds however this can vary. It is very important to make sure you know the MER of any type of index fund or ETF you are considering.
Lets look at an example: Nifty Benchmark exchange traded scheme (Nifty BeES) This etf contains all the publicly traded INDIAN stocks. The expense ratio is 0.07% which means that for every Rs.10,000 of Nifty BeES you own Vanguard will charge you Rs.7. Keep in mind this fee gets deducted directly from the fund you dont get charged separately.
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Comparative analysis of Exchange Traded Funds and Index funds The index fund counterpart to Nifty Index Fund. This fund comes with two different expense ratios
0.15% if you have between Rs.3,000 and Rs.100,000. These are the Investor Shares.
0.07% if you have more than Rs.100,000. Admiral Shares.
These are the
From these numbers you can see that if you have less than Rs.100,000 then the ETF version would be lower cost over Rs.100k the fees are a wash. But the expense ratio is not the only cost! Trading costs These are the costs associated with buying more units or shares of an index fund or ETF. Typically you dont have to pay trading costs with mutual funds (index funds are a type of mutual fund) especially if it is a regularly scheduled purchase. ETFs on the other hand need to be purchased through a brokerage so you will have to pay trading fees everytime you make a purchase. Automation of trades One of the great advantages to index funds (and mutual funds in general) is that you can automate your purchases. If you want to contribute a certain amount each month in a few different funds then automating that process allows you to set it and forget it. Once you set up the automated monthly purchases money will be pulled from your bank account and the purchases will be made without you having to do anything. This is the single biggest reason why I think that most investors should invest in index funds rather than ETFs if they make regular purchases.
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Comparative analysis of Exchange Traded Funds and Index funds Automation is a big issue for two reasons: 1. Laziness is the enemy. If I have to log in and do some trades every month, once the novelty wears off then I will be sure to forget. 2. Market timing. As a passive investor I know Im wasting Regardless, every
my time by trying to time the market.
single time Ive ever had to place an order for an ETF I always try to time the market. I will sit there and watch the price movements for a while and see if I can get a better price. Once the order is finally placed then Ill check back later to see if I should have waited a while before buying. This behaviour is a complete waste of time but inexplicably, I do it every time. Buying index funds on a monthly purchase plan will save me a lot of time and stress.
Conclusion: As with many financial decisions, determining which investment vehicle to commit to comes down to "dollars and cents". Given the comparison of costs, the average passive retail investor will decide to go with index funds. For these investors, keeping it simple can be the best policy. Passive institutional investors and active traders, on the other hand, will likely be swayed by qualitative factors in making their decision. Be sure you know where you stand before you commit. Like many things in life, there is no clear answer to the question of whether index funds or ETFs are the better investment vehicle Expense ratios, size of portfolio and frequency of trading are all important variables to consider but most investors think index funds are superior.
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Comparative analysis of Exchange Traded Funds and Index funds ANALYSIS AND FINDINGS OF THE STUDY Analysis of the Study:
I.
Period of the Study:
The study covers a period of five years from 2005 to 2009 for the purpose of evaluating the performance of select Exchange Traded Funds and Index Funds in India. However, for the purpose of analyzing the trends and progress of Index funds and ETFs in India, the data are collected since inception viz., 1998 and 2002 respectively.
II.
Sample Size:
There are 19 ETF schemes (including 7 Gold ETFs) and 24 Index Funds in India. Out of which, data with regard to all the parameters selected for the evaluation of performance were available only for 10 ETF schemes and 19 Index funds which were operating between the period of 2005 2009. Hence, the study is made only for these funds. The parameters for evaluating the performance are Net Asset Value, Risk, Return, Expenses Ratio, Tracking Error, Reward to Variability (Sharpe) and Differential Return (Alpha).
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Comparative analysis of Exchange Traded Funds and Index funds III. Statistical Techniques:
The data are analyzed with the help of statistical tools like Standard Deviation, Sharpe Ratio, Alpha, R-Squared and Beta. 1. Sharpe Ratio:-
Where:Sp: Sharpe Ratio. ERp: Expected Portfolio Return. RF : Risk free Return. p :Slandered Deviation. 2. Jensons Alpha:-
Where:Ri : Realized Return. Rf : Riskfree Return. Rm : Market Return. 3. Beta:-
Where:: Measure of systematic risk.
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Comparative analysis of Exchange Traded Funds and Index funds 4. R Squared:-
[ Where:-
r : Coefficient of correlation. 5. Standard Dividend:-
Where:X : is the expected return on security X : is the mean or the weighted average return
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Trends and Progress of Exchange Traded Funds and Index Funds
The Mutual Funds are a fast growing sector of the Indian Financial Markets. They have become a major vehicle for mobilization of savings, especially from the small and household savers for investment in the capital market. Mutual Funds entered the Indian Capital Market in 1964 with a view to provide the retail investors the benefit of diversification of risk, then, assured they returns have and professional management. Since grown
phenomenally in terms of number of funds, size of operations, investor base and scope. With the ushering in of economic reforms in the early 1990s, the Government of India opened the way for the entry of private sector and foreign players into this industry today. In India, the Mutual Fund Industry came into being with the establishment of Unit Trust of India in 1964. Public sector banks and Financial Institutions began to establish Mutual Funds in 1987. The private sector and foreign institutions were allowed to set up mutual funds in 1993. Mutual Funds have come forward with varying schemes suitable to the needs of saving populace. By March 2010, there were 42 mutual fund houses in India with Assets Under Management of Rs.7.47 lakh crores (approx) as shown in Table 1 below
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Table 1: Assets Under Management (Aum) Of All Mutual Funds At The End Of March 2010 (Rs. In Crores)
S.No.
Mutual Fund Name
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42
AEGON Mutual Fund AIG Global Investment Group Mutual Fund Axis Mutual Fund Baroda Pioneer Mutual Fund Benchmark Mutual Fund Bharti AXA Mutual Fund Birla Sun Life Mutual Fund CanaraRobeco Mutual Fund Deutsche Mutual Fund DSP BlackRock Mutual Fund Edelweiss Mutual Fund Escorts Mutual Fund Fidelity Mutual Fund Fortis Mutual Fund Franklin Templeton Mutual Fund Goldman Sachs Mutual Fund HDFC Mutual Fund HSBC Mutual Fund ICICI Prudential Mutual Fund IDBI Mutual Fund IDFC Mutual Fund ING Mutual Fund JM Financial Mutual Fund JPMorgan Mutual Fund Kotak Mahindra Mutual Fund L&T Mutual Fund LIC Mutual Fund Mirae Asset Mutual Fund Morgan Stanley Mutual Fund MotilalOswal Mutual Fund Peerless Mutual Fund PRINCIPAL Mutual Fund Quantum Mutual Fund Reliance Mutual Fund Religare Mutual Fund Sahara Mutual Fund SBI Mutual Fund Shinsei Mutual Fund Sundaram BNP Paribas Mutual Fund Tata Mutual Fund Taurus Mutual Fund UTI Mutual Fund Grand Total
Excluding Fund of Funds - Domestic but including Fund of Funds - Overseas N/A 1,13,781.39 3,55,180.47 3,57,412.61 1,99,922.14 54,867.31 62,34,337.09 9,22,045.07 10,47,686.84 21,49,078.38 14,928.77 20,294.9 7,68,390.79 7,88,955.12 33,29,004.28 N/A 88,77,984.4 6,21,542.19 80,98,884.98 N/A 25,38,605.86 1,54,743.73 7,99,745.91 3,54,136.42 34,68,108.39 2,51,101.4 42,30,396.62 25,098.18 2,25,706.52 N/A 30,260.21 6,99,650.58 9,163.82 1,10,41,270.92 12,94,457.69 63,534.73 37,41,700.35 36,741.31 13,69,138.67 21,93,516.93 2,30,706.91 80,21,780.73 7,47,33,862.61
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Exchange Traded Funds In India

ETFs are the new products from the Mutual Fund Houses and are also slowly gaining popularity. They have huge potentiality to grow in India because of its technical advantages over traditional Mutual Funds. Gold ETFs are also gaining popularity from the last one year. Once an equity market stabilizes, the Fund Houses are ready to start new kind of product in this area. Table 3 below tells us the different schemes available in India and their individual AUM. Table 3: Funds Mobilized By Exchange Traded Funds As On March 2010
Sr. No. 1
Name of the Fund
Amount (Rs. In Crores)
Banking Index Benchmark Exchange Traded 6,079.65 Scheme (Bank BeES)
Gold Benchmark Exchange Traded Scheme 76,092.63 (Gold BeES)
Hang
Seng
Benchmark
Exchange
Traded 4,059.45
Scheme (Hang SengBeES) 4 5 6 7 8 KOTAK GOLD ETF Kotak Nifty ETF Kotak PSU Bank ETF Kotak Sensex ETF 12,601.43 4,238.48 2,865.24 2,867.61
Liquid Benchmark Exchange Traded Scheme 35,031.86 (Liquid BeES)
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Comparative analysis of Exchange Traded Funds and Index funds 9 Nifty Benchmark Exchange Traded Scheme- 40,776.19 Nifty BeES 10 Nifty Junior Benchmark Exchange Traded 8,562.31 Scheme (Junior BeES) 11 PSU Bank Benchmark Exchange Traded 785.94
Scheme (PSU Bank BeES) 12 13 Quantum Gold Fund (an ETF) 1,662.49
Reliance Banking Exchange Traded Fund- 1,281.59 Dividend Option
14 15 16
Religare Gold Exchange Traded Fund SBI GOLD EXCHANGE TRADED SCHEME
1,230.07 10,496.27
Sensex ICICI Prudential Exchange Traded 96.43 Fund
17 18
ShariahBeES UTI GOLD Exchange Traded Fund Grand Total
124.48 30,837.22 2,39,689.34
Source: AMFI
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Comparative analysis of Exchange Traded Funds and Index funds FINDINGS: It is found that the total AUM of ETFs approximately is
Rs.2,39,689crores. The Gold Benchmark Exchange Traded Scheme (Gold BeES) is having the highest total AUM of Rs.760.93 crores followed by Nifty Benchmark Exchange Traded Scheme- Nifty BeES with a sum of Rs. 407.76 crores. The funds mobilized during the quarter are Rs.19 lakh Crores under Gold ETF, Rs.167 Crores under Other ETFs. The total funds mobilized by the GOLD ETFs are very high i.e Rs.1552.30 crores than compared to other exchange traded funds. The total proportion of ETFs in the total sum of Mutual Fund Sector is very low i.e. 0.32%.
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Index Funds in India

An Index Fund is a Mutual Fund scheme that invests in the securities of the target Index in the same proportion or weight age. Since the first Index Fund launched, the Index Funds market in India has been growing steadily. The table below gives the total AUM of Index funds. Table 4: Funds Mobilized By Index Funds As On March 2010 Sr. No. Name Of The Fund Amount (Rs. Crores) 1 2 3 4 5 6 7 Benchmark S&P CNX 500 Fund - Dividend Benchmark S&P CNX 500 Fund - Growth Birla Sun Life Index Fund-Plan A (Dividend) Birla Sun Life Index Fund-Plan B (Growth) Canara Robeco Nifty Index-Dividend Canara Robeco Nifty Index-Growth Franklin India Index Fund Dividend Plan 8 Franklin India Index Fund - BSE Plan - Growth 3,273.35 Plan 9 Franklin India Index FundNifty Plan - 4,786.7 - BSE Plan 17,642.13 2,750.02 1,484.12 1,735.78 423.09 472.42 - 3,045.37 In
Dividend Plan 10 Franklin India Index Fund- Nifty Plan - Growth 8,223.93 Plan
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Comparative analysis of Exchange Traded Funds and Index funds 11 12 13 Franklin India Index Tax Fund HDFC Index Fund-Nifty Plan(FV Rs 10.326) HDFC Index FundSensex Plan( FV Rs 32.161) HDFC Index Fund-Sensex Plus( FV-Rs32.161) 14 15 ICICI Prudential Index Fund LICMF Index Fund-Nifty-Dividend LICMF Index Fund-Nifty-Growth 16 LICMF Index Fund-Sensex Advantage-Dividend LICMF Index Fund-Sensex Advantage-Growth 17 LICMF Index Fund-Sensex-Dividend LICMF Index Fund-Sensex-Growth 18 Principal Index Fund-Dividend Principal Index Fund-Growth 19 20 Quantum Index Fund SBI Magnum Index Fund - Dividend SBI Magnum Index Fund - Growth 21 22 Tata Index Fund - Nifty A Tata Index Fund - Sensex A Tata Index Fund - Sensex B 23 UTI - Master Index Fund-Growth Option UTI - Master Index Fund-Income Option 24 UTI - NIFTY Index Fund-Growth Option UTI - NIFTY Index Fund-Income Option Grand Total
(Source AMFI)
272.42 5,221.48 6,209.68 5,552.83 9,660.12 6,705.65 1,356.98 263.75 252.47 1,050.06 2,393.12 570.14 1,588.56 120.17 710.6 1,561.55 981.64 639.23 14.68 4,985.8 1,676.74 17,906.96 5,495.69 1,19,027.23
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Comparative analysis of Exchange Traded Funds and Index funds FINDINGS: The above table shows that the total AUM of Index Funds are Rs.1.19 lakh crores as on March 2010. The UTI - NIFTY Index FundGrowth Option is having the highest AUM i.e. Rs.17906.96 crores followed by the other Index Funds. LIC Mutual Fund Company is offering various types of Index Mutual Funds than compared to the others. The proportion of Index Funds in total AUM was very low i.e. 0.16%. It can be observed that the funds mobilized by ETFs (Rs.2.4 lakh Crores) is much higher than the funds mobilized by Index Funds (Rs.1.19 lakh Crores). The total amount mobilized by these two funds represents 0.32% and 0.16% respectively of the total AUM of Mutual Funds as on 31.03.2010.
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Comparative analysis of Exchange Traded Funds and Index funds Trends in Etfs and Index Funds in India The recent explosion of the investors interest in ETFs and Index Funds in the developed market can be explained in part by the retail investors increased understanding of its inherent advantages relative to the traditional Mutual Funds and growing popularity of indexation as core investment strategy. The table below shows the trends of ETFs and Index Funds in India. Table 5:Trends in Etfs and Index Funds in India Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Grand Total Equity ETF 1 1 1 2 2 1 3 11 Gold ETF 4 1 1 2 8 Index Funds 1 1 3 7 5 1 2 4 24 Total 1 1 3 8 6 2 6 5 2 9 43
Source: AMIF
FINDINGS: The first Index Fund was launched by UTI Master Index Fund on 1st July 1998. More number of Index Funds are issued in the years 2002 and 2003. The Gold ETFs are introduced in the year 2007 and the recession in the capital market and the growth rate in the prices of Gold rates led to the introduction of more number of Gold ETFs in India. It is found that there are 641 mutual fund schemes operating in India and the proportion of both the Index Funds and ETFs are very small i.e 43 schemes accounting to 6.71 per cent.
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Comparative analysis of Exchange Traded Funds and Index funds Performance Evaluation of ETFs Vis--Vis-INDEX Funds The performance evaluation of ETFs and Index Funds is made with the help of select parameters viz., 1. Return. 2. Risk. 3. Tracking Error. 4. Expenses Ratio. Returns of ETFs and INDEX Funds in India ETFs have been gaining investors interest. ETFs are essentially Index Funds that are listed and traded on exchanges like stocks. They enable the investors to get a broad exposure to the stock markets in different countries and specific sectors, with relative ease, on a real-time basis. This also comes at a lower cost than many other forms of investments. The table below gives details relating to the Returns of the ETFs and Index Funds during the period 2005 to 2009.
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Comparative analysis of Exchange Traded Funds and Index funds Table 5: Annual Returns of Exchange Traded Funds As On 31st December (Figures in %) Sr. No. 1 2 Banking BeES 30.85 33.62 --65.34 76.08 -48.63 -60.58 77.78 85.93 Name of the Fund 2005 2006 2007 2008 2009
DB x-trackers S&P --CNX NIFTY ETF
3 4 5
Kotak PSU Bank ETF --Kotak Sensex ETF Lyxor ETF ---
----39.83
----54.77
-39.57 ---51.79
76.23 82.10 75.76
India ---
(S&P CNX NIFTY) 6 Nifty ETS 7 8 9 10 Nifty Junior BeES PSU Bank BeES Quantum Index Reliance ETF 11 ShariahBeES ---------10.94 25.22 ----28.63 ------75.12 -------63.26 -39.58 ----122.70 71.15 75.37 82.86 Benchmark 37.75 41.49 55.97 -51.28 74.57
Banking ---
SOURCE: ValueResearch
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Comparative analysis of Exchange Traded Funds and Index funds Table 6: Annual Returns Of Index Funds As On 31st December (Figures in %) Sr. Name of the Fund No. 1 Benchmark S&P CNX 500 2 Birla Sun Life Index 3 4 CanaraRobeco Nifty Index Franklin India Index BSE Sensex Franklin India Index Tax Fund HDFC Index Nifty ICICI Prudential Index Retail ICICI Prudential SPIcE Franklin India Index NSE Nifty LIC MF Index Nifty LIC MF Index Sensex Magnum Index Principal Index TATA Index Nifty TATA Index Sensex A TATA Index Sensex B UTI Master Index UTI Nifty Index UTI Sunder ING Vysya Nifty Plus Fund 2005 --36.05 36.34 42.02 36.45 36.52 39.98 42.54 38.50 35.20 37.47 33.82 33.10 42.91 37.73 --43.11 37.16 37.01 30.34 2006 --39.04 36.80 43.74 39.58 37.12 41.94 47.69 40.19 33.02 45.00 42.05 36.09 43.77 46.45 --47.31 40.78 41.18 41.42 2007 --55.30 54.79 46.61 53.22 49.05 56.46 46.78 50.00 47.95 37.59 49.46 52.23 52.21 45.20 --46.65 53.58 55.83 50.96 2008 --52.90 51.44 51.46 51.44 53.46 50.36 51.12 52.07 52.71 53.80 53.27 52.39 52.37 53.06 --52.83 51.96 50.73 51.27 2009 2.88 75.49 71.64 79.83 73.06 70.43 75.57 78.41 75.32 65.86 74.96 74.74 72.33 73.83 78.83 37.50 80.00 73.80 75.45 73.08
5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
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Comparative analysis of Exchange Traded Funds and Index funds Source: Value Research FINDINGS: It is observed that all the ETFs are generating positive returns during the year 2009. The Nifty Junior BeES generated the highest return i.e. 122.70 per cent among the entire ETFs in the year 2009 followed by db x-trackers S&P CNX NIFTY ETF. The returns of all the ETFs are positive in all the years except in 2008. The above table reveals that all the Index Funds are generating positive return in the year 2009. UTI Master Index Fund and Franklin India Index BSE Sensex are giving the highest annual return i.e. 80 per cent among all the Index Funds. It is found that more number of schemes are generating more than 70 per cent annual returns to their investors. The Benchmark S&P CNX 500 and TATA Index Sensex B are generating lowest returns because they are introduced in the second quarter of the year 2009. It is observed that all the Index Funds generated negative returns in the year 2008 due to the financial crisis during that period. A comparison of the returns of both, the Index Funds and ETFs reveals that the ETFs, are better performing than the Index Funds. The Average returns of all the ETFs, by and large, is 75 per cent and above whereas the average returns of the Index funds is, by and large, 70 per cent. The Nifty Junior BeES (ETF) is generating the highest return among all the schemes in India.
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Risk Analysis of ETFs and Index Funds

The risk is analyzed with the help of Standard Deviation, Beta and R-squared. Standard deviation is a measure of the deviation in the returns of the portfolio. A volatile stock would have a high standard deviation. It tells us how much the return on a fund is deviating from the expected returns based on its historical performance. The below tables give the details relating to Standard deviation, Sharpe ratio, beta, R-squared value and Jensons Alpha.
Table 7:Risk Analysis of Exchange Traded Funds Sr. Name of Standard Dev. (%) Sharpe Ratio (%) 1 Banking BeES 2 Nifty Benchmark ETS 3 Nifty Junior 46.03 BeES 4 ShariahBeE S Source: Value Research Note: The performance evaluation tools in the table above are calculated taking the monthly returns up till the year 2009 17.18 0.58 0.99 1.00 -0.25 0.30 0.99 1.00 -0.75 35.38 0.25 0.99 1.00 -0.79 47.33 0.37 1.00 1.00 0.07 Beta (%) RSquared Alpha (%)
No. the Fund
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Comparative analysis of Exchange Traded Funds and Index funds Table 8:Risk Analysis of Index Funds Sr. No Name the Fund of Standar d (%) 1 Franklin India Index NSE Nifty 2 Birla Sun Life 35.96 Index 3 CanaraRobec o Nifty Index 4 Franklin India Index BSE Sensex Franklin India Index Tax Fund 5 HDFC Nifty 6 ICICI Prudential Index Retail 7 ICICI Prudential SPIcE 8 LIC MF Index Nifty 35.25 0.14 0.99 1.00 -4.49 33.95 0.23 0.96 1.00 -1.14 35.53 0.28 1.00 1.00 0.17 Index 34.78 0.13 0.98 1.00 -4.78 34.87 0.19 0.98 1.00 -0.63 34.80 0.23 0.99 1.00 1.05 35.12 0.22 0.99 1.00 -1.72 0.24 1.01 1.00 -1.17 35.53 Sharpe (%) 0.23 1.00 1.00 -1.50 Beta RSquared Alpha (%)
Dev. Ratio
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Comparative analysis of Exchange Traded Funds and Index funds 9 LIC MF Index 34.94 Sensex 10 Magnum 35.37 Index 11 Principal 35.27 Index 12 TATA Index 35.39 Nifty 13 TATA Index 34.99 Sensex A 14 UTI Master 35.19 Index 15 UTI Nifty 35.34 Index 16 UTI Sunder 34.96 17 SBI Magnum 35.09 Index Fund 18 ING Vysya 34.13 Nifty Plus Fund 19 Benchmark 15.95 S&P CNX 500 8 LIC MF Index 35.25 Nifty 9 LIC MF Index 34.94 Sensex 10 Magnum 35.37 Index 11 Principal 35.27 Index Source: Value Research 0.13 0.18 0.20 0.21 0.18 0.21 0.22 0.27 0.12 0.18 0.98 0.14 0.13 0.18 0.20 0.98 0.99 0.99 0.99 0.99 1.00 0.99 0.98 0.96 0.96 0.97 0.99 0.98 0.99 0.99 0.98 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.98 1.00 1.00 -4.57 -3.09 -2.45 -2.17 -2.67 -1.90 -1.97 -0.17 NA -0.88 NA -4.49 -4.57 -3.09 -2.45
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Comparative analysis of Exchange Traded Funds and Index funds FINDINGS Standard Deviation It is found that among the ETFs, The Banking BeES is having the highest risk i.e. 47.33 per cent and Shariah BeES has the lowest risk i.e. 17.18 per cent. In the case of Index Funds, Birla Sun Life Index has the highest risk i.e., 35.96 per cent and the Benchmark S&P CNX 500 has lowest risk i.e. 15.95 per cent. The standard deviations of the ETFs are higher than the Index Funds. It means that the deviation of expected return is more in ETFs than Index Funds. ETFs are riskier compared to Index Funds as a result, its returns are higher as compared to Index Funds as seen earlier. Sharpe Ratio It shows the return to variability. Higher the ratio, better
performance, in terms of the return for the risk taken. It is found that all the ETFs and Index Funds are showing a positive Sharpe ratio. When compared to Index Funds, ETFs have the higher average ratio. According to Sharpe ratio, ETFs are giving better performance for extra risk taken by the investors. ALPHA Alpha measures the excess of returns over market return of the scheme. Here, all the schemes in the ETFs and Index Funds are having a negative alpha excepting the ICICI Prudential Index Retail and Banking BeES. This means that, only these two schemes are generating the excess returns than market return. R-Squared Value All the ETFs and Index funds have the R-squared values as 1.00. It means that, they have exact correlation with the underlying Index and are moving in the same direction as that of the market returns.
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Comparative analysis of Exchange Traded Funds and Index funds Beta Value Beta measures the systematic risk and explains the nature of the volatility of the security return with that of the market return. If beta values are less than one, it means that Funds risk is less than the market risk; if it is one, it means the Funds risk is same as that of the market risk and if the beta is more than one, the risk of the Funds is greater than that of the market. All the Funds, by and large, have the beta values on an average approximately equal to 0.98, implying lower volatility in the returns of the ETFs and Index Funds than the underlying Index volatility. Tracking Error of ETFs on d INDEX Funds Tracking error is a measurement of how much the return on a portfolio deviates from the return on its benchmark index. It is a very important metric for index trackers. Tracking error is the standard deviation of the differences between the return on the portfolio and the return on the benchmark; the standard deviation of the excess returns: 2 = 1/(n - 1) (xi - yi)2 Where is the tracking error n is the number of periods over which it is measured x is the percentage return on the portfolio in period i y is the percentage return on the benchmark The below tables shows the tracking error of the various selected schemes.
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Comparative analysis of Exchange Traded Funds and Index funds Table 9:Tracking Error of ETFs As On 31st December 2009 Sr. No. 1 2 3 4 Name of the Fund Nifty Benchmark ETF Banking BeES Nifty Junior BeES PSU Bank BeES % 0.09 0.19 0.12 0.68
Source: Fact Sheets of Select Mutual Funds
Table 10:Tracking Error Of Index Funds As On 31st December 2009 Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 Name of the Fund SBI Magnum Index Fund UTI Sunder HDFC Index Fund HDFC Index Fund Nifty Franklin India Index NSE Nifty Franklin India Index BSE Sensex Benchmark S&P CNX 500 ICICI Prudential Index Retail UTI Nifty Index UTI Master Index SBI Magnum Index Fund UTI Sunder HDFC Index Fund % 1.09 1.15 2.41 2.69 0.23 0.27 1.72 1.89 0.53 0.53 1.72 1.89 0.53
Source: Fact Sheets of Select Mutual Funds
FINDINGS: It is found that the tracking error is very high in HDFC Index Fund Nifty i.e. 2.69 and it is very low in Nifty Benchmark ETF i.e. 0.09 only. It shows that the tracking error is very high in Index Funds compared to ETFs.
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Expenses Ratio of ETFs and INDEX Funds In India

An expense ratio tells as to how much a Fund costs. The amount is skimmed from the investors account and goes towards paying a Funds total annual expenses. It is expressed as a percentage of a Funds Net Assets. If an investor invests in an ETF with an expenses ratio of 0.10 per cent and has invested Rs.3000 in that Funds, the investor has to pay Rs.3 a year in expenses. The tables below give the details of expenses ratio of the select schemes of ETFs and Index Funds during the period 2005-2009. Table 11: Expenses Ratio of ETFs Sr. No. 1 2 3 4 Name of the Fund 2005 0.45 ----0.80 1.00 --------2006 0.45 ----0.56 1.00 --------2007 0.48 ----0.33 1.00 --------2008 0.50 0.65 --0.50 1.00 0.75 ------2009 0.50 0.65 0.50 0.50 1.00 0.75 0.35 0.85 0.73
Banking BeES Kotak PSU Bank ETF Kotak Sensex ETF Nifty Benchmark ETS 5 Nifty Junior BeES 6 PSU Bank BeES 7 Reliance Banking ETF 8 Lyxor ETF India (S&P CNX NIFTY) 9 ShariahBeES Source: Value Research
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Comparative analysis of Exchange Traded Funds and Index funds Table 12:Expenses Ratio of Index Funds Sr. Name of the Fund No. 1 Franklin India Index NSE Nifty 2 Benchmark S&P CNX 500 3 Birla Sun Life Index 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 CanaraRobeco Nifty Index Franklin India Index BSE Sensex HDFC Index Nifty ICICI Prudential Index Retail ICICI Prudential SPICE LIC MF Index Nifty LIC MF Index Sensex Magnum Index Principal Index TATA Index Nifty TATA Index Sensex A UTI Master Index UTI Nifty Index UTI Sunder SBI Magnum Index Fund ING Vysya Nifty Plus Fund IDBI Nifty Index Fund Quantum Index 2005 1.00 --2.89 1.00 0.99 1.50 1.25 0.80 1.10 1.31 1.25 1.60 1.16 1.26 0.75 0.75 0.50 --2.00 ----2006 1.00 --1.07 0.50 1.00 1.50 1.25 0.80 2.50 2.50 1.91 0.58 ----0.75 0.62 0.50 --2.17 ----2007 1.00 --1.50 0.50 1.00 1.50 1.25 0.80 2.50 2.50 2.09 0.75 1.44 --0.75 0.75 0.50 --2.5 ----2008 1.00 1.50 1.51 0.50 1.00 1.50 1.25 0.80 1.50 1.50 1.50 0.75 1.50 1.50 0.75 1.21 0.50 --2.5 ----2009 1.00 1.50 1.50 0.98 0.96 1.02 1.25 0.80 1.50 1.05 1.50 1.50 1.50 1.50 0.75 1.50 0.50 1.47 2.5 1.50 0.75
Source: Value Research
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Comparative analysis of Exchange Traded Funds and Index funds FINDINGS: It is found that the Nifty Junior BeES has the highest Expenses ratio i.e.1.00 per cent and Reliance Banking ETF has the lowest ratio i.e. 0.35 per cent. The average Expenses Ratio of ETFs ranges between 0.35 per cent to 0.75 per cent. The expenses ratio of Index Funds is stable and decreasing over the years. The UTI Sunder Index Fund has the lowest Expenses ratio i.e. 0.50 per cent and the ING Vysya Nifty Plus Fund has the highest expenses ratio i.e. 2.5 per cent. The average expenses ratio of all the schemes ranges between 0.50 per cent and 2.50 per cent. The ETFs have the lowest expenses ratio as compared to the Index funds.
MAJOR FINDINGS ETFs have given better opportunity for the small investors in terms of diversified portfolio with a small amount of money. Benchmark AMC issued more number of ETFs than other AMCs. ETFs investment has given better performance over Index Funds and other traditional Mutual Funds. Expense ratios of ETFs are very less compared with the Index Funds. Therefore, investing in ETFs is less costly. Reliance Bank ETF has achieved 0.35 per cent of expense ratio. More than 1 per cent of the expenses can be saved in ETFs compared to Index Funds. Problem of tracking error can be reduced by the ETFs and tracking error of the ETFs is very less than Index Funds. Here, though the underlying asset is same, tracking error is less in ETFs, thus, automatically ETFs give better returns than Index Funds.
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Comparative analysis of Exchange Traded Funds and Index funds Intra day Trading is the biggest opportunity for short term investors because more than 70 per cent of trading in NSE will end with intra day. At present Rs 400-450 of one Unit of ETF gives the diversification of Nifty 50 companies. Thus, these are affordable to the small investors. ETFs are better than Index Funds in terms of Risk and Volatility. According to Sharpe ratio, ETFs give better performance for extra risk taken by the Investors. All the ETFs and Index Funds have the R-squared values as 1.00. It means that, they have exact correlation with the underlying Index and are moving in the same direction as that of the market returns.
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Conclusion & Recommendation

In the last fifteen years, since 1993, the popularity of ETFs has increased manifold. This has attracted a lot of attention from both the investors as well as the market participants, resulting in the introduction of a variety of ETFs and continuous innovations in the ETF industry. As the variety of financial indices is increasing, there has been a corresponding increase in the spectrum of ETF varieties available in the market. ETFs have technical advantages over Mutual Funds and have shown an ability to capture investors' money. They are low cost, having less tracking error and more liquid. They are a good investment suitable to individual investors and professionals. However, now, the Indian economic conditions are gradually stabilizing and equity markets are performing well because of political stability and positive signs about economy. Investors always look for better returns and it is the equity markets which can give better returns and therefore, there is a huge potentiality for the introduction of more equity ETF products in India. However, the ETFs can become a best investment alternative, provided, awareness is created among the investors.
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Comparative analysis of Exchange Traded Funds and Index funds BIBLIOGRAPHY 1. Philippe Jorion, Portfolio Optimization with Tracking-Error Constraints, Financial Analysts Journal, September/October 2003, pp-70-82. 2. Ammann, Investment M., Kessler, S., Tobler, J., Analyzing error Active Strategies Using Tracking variance
Decomposition, Journal of Portfolio 2006, pp 56-67.
management, 33(1),
3. B PhaniswaraRaju and K MallikarjunaRao, Market Timing Ability of selected Mutual Funds in India: A Comparative study (2009), ICFAI Reader, May 2009. 4. Investment management V. A. Avadhani 5. Investment management V. K. Bhalla
WEBSITES: www.valurresearch.com www.nseindia.com www.bseindia.com www.benchmarkfunds.com www.amfiindia.com www.mutualfundsindia.com www.etftrends.com www.indexfunds.com www.investiopedia.com www.sharekhan.com
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Kotak Mutual Funds:1. 2. 3. 4. Kotak Kotak Kotak Kotak Gold ETF PSU Bank ETF Sensex ETF Niffty ETF
1. Kotak Gold ETF

The Scheme Structure Investment Objective Kotak Gold ETF (KGEFT) An Open ended Exchange Traded Fund. The investment objective of the scheme is to generate returns that are in line with the returns on investment in physical gold, subject to tracking error. About the scheme Kotak Gold ETF is an open-ended gold Exchange Traded Fund, which invests in physical gold and endeavors to track the domestic spot price of gold as closely as possible. Thus it provides an option to invest in gold without taking physical delivery of gold. Each unit of KGEFT is approximately equal to 1 gram of gold. KGEFT is backed by physical gold held by the Custodian (Scotia Macotta). All physical gold metal held with Scotia Macotta conforms to the London Bullion Market Associations (LBMA) rules for Good Delivery. Investment In The Fund would invest in gold, and endeavor to track the spot price of gold. The Fund would invest all the residual funds after investing in gold, in debt and money market instruments.
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Comparative analysis of Exchange Traded Funds and Index funds Fund Manager Exchange Listed Pricing per unit Minimum Investment Creation size Benchmark Allotment Date Entry Load Exit Load Exchange Symbol ISIN Bloomberg Code INF373I01015 KOGOLD 1000 units. Domestic price of gold. July 27, 2007 Nil Nil KOTAKGOLD Mr.AbhishekBisen. Bombay Stock Exchange & National Stock Exchange. Approximately 1 gram of Gold. 1 unit.
Reuters Code ICICI Direct HDFC Securities Kotak Securities MotilalOswal Share Khan India Bulls
KTGF.NS KOTGOL KOTGOL
KOTAKGOLD
KOTAKGOLD KOTAKGOLD KOTAKGOLD
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2. Kotak PSU Bank ETF

The Scheme Structure Investment Objective Kotak PSU Bank ETF An Open ended Exchange Traded Fund. The investment objective of the scheme is to provide returns that closely correspond to the total returns of CNX PSU Bank Index, subject to tracking errors. Investment In The scheme will invest in the securities that comprise the CNX PSU Bank Index and in the same proportion as in the Index. Fund Manager Exchange Listed Pricing per unit Creation Size Benchmark Allotment Date Entry Load Exit Load Exchange Symbol ISIN Bloomberg Code Reuters Code KTPU.NS INF373I01023 KOPSUB IN Equity 1/10th CNX PSU Bank Index Value 10000 units & in multiples thereof. CNX PSU Bank Index. November 9, 2007 Nil Nil KOTAKPSUBK Mr. Deepak Gupta National Stock Exchange (NSE)
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3. Kotak Sensex ETF
The Scheme Structure Investment Objective
Kotak Sensex ETF An Open ended Exchange Traded Fund. The investment objective of the scheme is to provide returns before expenses that closely correspond to the total returns of the BSE SENSEX subject to tracking errors.
Investment In
The scheme will invest in the stocks that comprise the BSE Sensex and in the same proportion as in the index.
Fund Manager Exchange Listed Pricing per unit Creation size Benchmark Allotment Date Entry Load Exit Load Exchange Symbol ISIN Bloomberg Code
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Mr. Deepak Gupta Bombay Stock Exchange.
1/100th of SENSEX. 10000 units & in multiples thereof. BSE Sensex. June 6, 2008 Nil Nil KTKSENSEX
INF373I01031 KOTSS IN
4. Kotak Niffty ETF
The Scheme Structure Investment Objective
Kotak Nifty ETF An Open ended Exchange Traded Fund. The investment objective of the scheme is to provide returns before expenses that closely correspond to the total returns of the S&P CNX Nifty subject, to tracking errors.
Investment In
The scheme will invest in the stocks that comprise the S&P CNX Nifty and in the same proportion as in the index.
Suitable for
Investors who : 1. Believe that the market as a whole is more efficient than the individuals who are a part of it and hence, it is difficult to outperform the market. 2. Believe in investing in mutual fund schemes that follow a passive investment strategy.
Liquidity
All investors including Authorised Participant(s), Large Investors and other investors may sell their units in the stock exchange(s) on which these units are listed on all the trading days of the stock exchange.
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Comparative analysis of Exchange Traded Funds and Index funds Mutual fund will repurchase units from Authorised Participant(s) and Large Investors on any business day provided the value of units offered for repurchase is not less than creation unit size. The redemption consideration shall normally be the basket of securities represented by S&P CNX Nifty in the same weightage as in the Index and cash component. Fund Manager Exchange Listed Pricing Per Unit Mr. Deepak Gupta Bombay Stock Exchange & National Stock Exchange. Approximately valued at 1/10 of the S&P CNX NIFTY value. Allotment Date Minimum Investment
February 2, 2010 During NFO : The minimum investment amount during the New Fund Offer is Rs.10,000 /- and in multiples of Rs.1000
In case of investors opting to switch into the Scheme from existing Schemes/Plans/Options of the Fund during the NFO period, the minimum amount is Rs. 10,000/- and in multiples of Re. 0.01 thereof.
Ongoing Basis :
On going purchases directly from the Mutual Fund would be restricted to Authorized Participants provided the value of units to be purchased is in creation unit size. Authorised
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Comparative analysis of Exchange Traded Funds and Index funds Participants may buy the units on any business day of the scheme directly from the Mutual Fund at applicable NAV, and transaction charges by depositing basket of securities comprising S&P CNX Nifty
The units would be initially listed on NSE to provide liquidity through secondary market. It may also list on any other exchanges subsequently. All categories of Investors may purchase the units through secondary market on any trading day. The AMC will appoint Authorised Participant(s) to provide liquidity in secondary market on an ongoing basis. The Authorised Participant(s) would offer daily two-way quote in the market.
Creation unit size
Creation Unit is fixed number of units of the Scheme, which is exchanged for a basket of securities underlying the index called the Portfolio Deposit and a Cash Component equal to the value of 5,000 units of the Scheme. For redemption of units it is vice versa i.e. fixed number of units of Scheme are exchanged for Portfolio Deposit and Cash Component. The Portfolio Deposit and Cash Component will change from time to time. The creation unit size may be changed by the AMC at their discretion and the notice of the same shall be published on AMCs internet site.
Benchmark
S&P CNX Nifty index.
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Comparative analysis of Exchange Traded Funds and Index funds Loads Entry Load : Nil n terms of SEBI Circular No. SEBI/IMD/CIR No. 4/168230/09 dated June 30, 2009, no entry load will be charged on purchase / additional purchase / switch-in. The upfront commission, if any, on investment made by the investor shall be paid by the investor directly to the Distributor, based on his assessment of various factors including the service rendered by the Distributor. Exit Load : Nil Cost of trading Investor will have to bear the cost of brokerage and other applicable statutory levies eg, Securities Transaction Tax, etc when the units are bought or sold on the stock exchange. Exchange Symbol Bloomberg Code Reuters Code KOTK.NS KONIFTY IN KOTAKNIFTY
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SBI Mutual Funds:
1. SBI Gold Exchange Traded Scheme
Investment Objective
The investment objective of the fund is to seek to provide returns that closely correspond to returns provided by price of gold through investment in physical Gold. However the performance of the scheme may differ from that of the underlying asset due to tracking error. Asset Allocation Instrument % of Portfolio of Plan A & B Debt & Money Market Instruments Gold and gold bullion 90-100% Medium to High Scheme Highlights Launch Date March 30, 2009 Minimum Application Rs. One Unit - Available through NSE Entry Load NA Exit Load NIL 0-10% Low Risk Profile
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Comparative analysis of Exchange Traded Funds and Index funds SIP NA Expense Ratio 1.30% Nav's Plan SBI Gold Exchange Traded Scheme Growth Option Latest Nav 2075.6798 Date 10/03/2011 SWP
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Comparative analysis of Exchange Traded Funds and Index funds

How much to invest?

Comparative analysis of Exchange Traded Funds and Index funds

Comparative analysis of Exchange Traded Funds and Index funds

Different Ways of Investing Money

Comparative analysis of Exchange Traded Funds and Index funds

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Comparative analysis of Exchange Traded Funds and Index funds

UNDERSTANDING MUTUAL FUND

Comparative analysis of Exchange Traded Funds and Index funds

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Low 4. Transaction Costs

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Comparative analysis of Exchange Traded Funds and Index funds

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Comparative analysis of Exchange Traded Funds and Index funds

Comparative analysis of Exchange Traded Funds and Index funds

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Comparative analysis of Exchange Traded Funds and Index funds

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Comparative analysis of Exchange Traded Funds and Index funds

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Comparative analysis of Exchange Traded Funds and Index funds

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Comparative analysis of Exchange Traded Funds and Index funds

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Exchange traded fund:

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Comparative analysis of Exchange Traded Funds and Index funds