The fund will closely track the stocks represented in the S&P CNX Nifty; but ETF volumes have remained on the lower side

More and more fund companies are launching passive mutual funds, also called index funds. Among the passive fund products, after launching index funds which are supposed to replicate the underlying index with 'passive' management, fund houses are now trying their hands at Exchange Traded Funds (ETFs). Birla Sun Life Mutual Fund has recently filed a draft offer document with the Securities and Exchange Board of India (SEBI) to launch an open-ended 'Nifty exchange traded fund' (ETF). The fund will closely track the stocks represented in the S&P CNX Nifty.

Over the past decade, around 20 index funds have hit the market. Suddenly in the past few months, we have seen a slew of index fund launches by fund houses. Taurus Mutual Fund launched Taurus Index Fund; IDFC Mutual Fund introduced the passively-managed IDFC Nifty Fund in April 2010 and in May 2010, IDBI Asset Management Company (AMC) launched IDBI Nifty Index Fund. This was followed by ICICI Prudential Mutual Fund which floated a Nifty Junior Index Fund in June.

Unlike index funds, ETFs do not carry an entry or exit load. Just like stocks, ETFs can be bought and sold through the stock exchanges on a real-time basis. ETFs can be cost-effective for investors as they charge a miniscule fund management fee compared to index funds. There has been as much a rush to launch ETFs, as index funds. There are 24 ETFs available in the market. Birla Sun Life Nifty ETF will be the fifth Nifty ETF joining the ranks of four existing ETFs like Kotak Nifty ETF, Nifty BeES, UTI Sunder, Motilal Oswal MOSt Shares M50 ETF, which are all benchmarked against the S&P CNX Nifty. The S&P CNX Nifty constitutes of 50 stocks.

Among the four existing ETFs benchmarked against S&P Nifty, UTI Sunder launched in July 2003 has yielded 26% compounded annual growth rate (CAGR) return since its inception while its benchmark S&P Nifty has posted 24.98% during the same period. Nifty BeES was launched in January 2002 by Benchmark Mutual Fund. The fund has posted an NAV return of 21% since inception while its benchmark climbed 20.77% between the same period. As these two examples prove, ETFs closely track the underlying indices. But not all funds manage funds passively while pretending to. Moneylife had earlier reported on how index funds have deviated from their objective of passive investment. See here: (http://www.moneylife.in/article/8/5098.html).

Motilal Oswal MOSt Shares M50 ETF is a fundamentally weighted basket based on the S&P CNX Nifty Index and has its own pre-defined methodology with different weights for the same Nifty stocks.

Despite their lower cost, ETFs continue to be unpopular among investors. Only two products - the ETFs launched by Benchmark Mutual Fund (Nifty BeES and Nifty Junior BeES) contribute to 90% of the trading volume. The low trading volumes are reflected in the bid-ask spread too.

According to The  Association  of  Mutual  Funds  in  India (AMFI) data, the assets under management (AUM) of ETFs (including gold ETFs) stood at Rs3,504 crore as on July 2010. During July 2010, ETFs saw net inflows of Rs530 crore.