Context:
Securities and Exchange Board of India (SEBI) has instructed mutual fund companies to cease accepting additional inflows into schemes that invest in foreign exchange-traded funds (ETFs).
- This directive will be effective from April 1, 2024.
News Highlights:
- Exchange Traded Funds (ETFs) –
- A type of investment security that can be bought and sold like individual stocks.
- They are considered marketable securities and represent a collective investment scheme.
- Reason for issuance of directive – the mutual fund industry has already reached 95% ($950 million) of the $1 billion limit for investments in ETFs.
Reserve Bank of India (RBI) has set an overall cap of $7 billion for overseas investments by mutual funds. This includes a separate cap of $1 billion specifically for investments in ETFs.
Comparison of ETFs and Mutual Funds:
| Key Aspect | ETFs | Mutual Funds |
| What are they? | Funds that copy an index and hold all stocks in the same proportion as the index. | Professionally managed funds that pool money from investors to invest in a variety of holdings. |
| Trading and Liquidity | Traded like stocks on the stock exchange, offering high liquidity. | Can only be bought or sold at the end of the day at the Net Asset Value (NAV) price. |
| Flexibility | Can be bought and sold freely in the market. | Can only be bought or sold by making a request to the fund house. |
| Cost Structure | Lower expense ratios as they just copy the performance of an index. | Higher management fees as they are actively managed by a fund manager. |
| Commissions | Investors need to pay commission to buy and sell units. | No commission for buying or selling. |
| Investment Approach | Passively managed, less risky and transparent as they mirror a particular index. | Actively managed, fund managers invest based on their analysis and market outlook. |
| Minimum Investment | Allows investors to start with smaller amounts. | Typically require a higher minimum investment. |
| Taxation | More tax-efficient due to lower capital gains tax. | Less tax-efficient. |
| Diversification | Offer targeted investments that mirror a particular index. | Offer more diversification options and exposure to a wider range of securities. |
| Types | Mainly 5 types: equity ETF, bonds ETF, commodity ETF, international ETF and sectoral/thematic ETF. | Various types like equity schemes, debt schemes, hybrid schemes, solution-oriented schemes, etc. |
Source: Indian Express
Previous Year Question
Consider the following markets:
1. Government Bond Market
2. Call Money Market
3. Treasury Bill Market
4. Stock Market
How many of the above are included in capital markets?
[UPSC Civil Services Exam – 2023 Prelims]
(a) Only one
(b) Only two
(c) Only three
(d) All four
Answer: (b)
Explanation:
Government Bond Market and Stock Market are part of the capital markets.
