How Liquidity In ETF Is Different From Liquidity In Stocks

Dalal Street Investment Journal|November 25 - December 8, 2019

How Liquidity In ETF Is Different From Liquidity In Stocks
The equity markets saw a good recovery in the month of October and early November.

However, many investors booked profits on their investments,thereby resulting in a decline in net inflows in equity dedicated mutual funds. For the month of October 2019, equity dedicated mutual funds saw a net inflow of ₹6,026 crore, which is a decline of 9 per cent sequentially and is also a five month low net inflow figure. Against this backdrop, Exchange Traded Funds (ETFs) saw a significant jump in inflows for the same period. From ₹1,521 crore of inflows in the month of September, the inflows in ETFs jumped fourfold to ₹6,682 crore in the month of October. One of the reasons for such increase is funds was deployment from Employees’ Provident Fund Organisation (EPFO) into appointed fund houses. At present, the EPFO is only allowed to make equity investments through passively-managed ETFs.

Apart from EPFOs, passive investment has been and is being popularly followed by various investor profiles. Investing in an index ETF, whose portfolio plainly mimics the composition of an index, is an example of passive investment as the investment does not call for any research and analysis to pick stocks. Like in the case of various developed markets, India may follow the popularity of passive investments; however, there are some misconception and lack of understanding about an ETF (a popular and common vehicle of passive investing), which is deterring some investors, especially retail investors. The point of confusion is many investors believe that since individual stocks and ETFs have many similarities, they might be sharing similar liquidity traits. Therefore, liquidity of the ETF is determined in a similar manner as liquidity of stocks. Nonetheless, ETFs are fundamentally different from stocks and have robust liquidity characteristics, which is frequently misunderstood.

Liquidity in ETF

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November 25 - December 8, 2019