By Joydeep Sen

A passive fund is one the place the fund supervisor doesn’t take any lively determination within the portfolio composition, however follows the index mandated for the fund. In case there may be any change within the index composition, the portfolio of the passive fund adjustments accordingly.

Operationally, a passive fund could also be within the type of an index fund the place it’s a standard mutual fund scheme as we all know it, or an ETF the place there is no such thing as a buy or redemption with the AMC however it occurs on the alternate. In an ETF, the items are listed on the alternate and the purchases / gross sales within the common course of enterprise occurs between buyers. In sure circumstances, in ETFs, the acquisition or sale will be with the AMC, in a minimal outlined lot measurement often known as creation unit.

Parameters to grasp index funds and ETFs:

Execution
Items of ETFs commerce on the alternate like fairness shares or different securities. It’s important to have a demat account and a buying and selling account with a dealer. These days, every thing is on-line, together with buying and selling on the alternate. There are cell phone apps that facilitate buying and selling in shares, together with ETFs. Index funds are like some other mutual fund scheme. You buy from the AMC and redeem with the AMC. These days this is also executed on-line. Paper-based / bodily execution is feasible, however in days to come back it might grow to be absolutely digitalised.

NAV and worth discovery
In index funds, purchases and redemptions can be on the internet asset worth (NAV), i.e., there is no such thing as a premium or low cost on the NAV. In ETFs, relying on the demand and provide equation and the buyers’ views on the underlying portfolio, buying and selling costs within the secondary market could also be at a slight premium or low cost to the NAV.

In any MF scheme, NAV is printed solely as soon as a day, late within the night, considering the closing costs of securities within the portfolio. In ETFs, one other degree of worth discovery will be inbuilt, although NAV can be printed within the night solely. In fairness ETFs, the place the underlying shares are liquid, the implied real-time NAV, on the worth prevailing at that time of time, will be disseminated on the web site of the AMC. It will facilitate higher worth discovery for buying and selling of ETF items throughout buying and selling hours.

Buying and selling in giant tons
Index funds are bought from and redeemed with the AMC. Since an AMC can not place restrictions on withdrawals, the investor is assured of liquidity. ETFs are open-ended, when required, by means of the outlined course of, the corpus measurement of the fund can change.

When a big investor intends to get rid of a giant lot and there usually are not sufficient takers within the secondary market, liquidity will be obtained, supplied the quantum is of the scale of the outlined creation unit. The authorised contributors mandated for the fund come into play, or the investor can method the AMC instantly. The AMC will extinguish items and supply money in such circumstances.

Price
Whereas all AMCs cost bills to the scheme, in ETFs the fees are comparatively decrease. There could be transaction prices for buying and selling within the secondary market. Normally the prices are decrease in an ETF, supplied you don’t commerce too typically.

Focus
The rule that one investor can maintain most 25% in a MF scheme will not be relevant to ETFs. In an ETF there is no such thing as a redemption with the AMC and often, for lot sizes lower than the outlined creation unit, the secondary market is the one route for liquidity.

The author is a company coach (debt markets) and an writer

INDEX FUNDS VS ETF
In index funds, purchases and redemptions are at NAV. In ETFs, relying on the demand and provide equation and buyers’ views on the underlying portfolio, buying and selling costs within the secondary market could also be at a slight premium or low cost to the NAV

In ETFs, purchases and gross sales occur between buyers. In sure circumstances, the acquisition or sale will be with the AMC, in a minimal outlined lot measurement often known as creation unit.