DEVELOPING PASSIVE INVESTING

NEED TO KNOW | Market regulator SEBI brings in regulations to improve and open up the complex exchange traded funds (ETFs) and index funds as a viable option for investors

- Narayan Krishnamurthy

Market regulator SEBI came up with a host of regulations for passively managed funds with a circular in May. The circular is aimed at improving the liquidity, tracking error limits and disclosures for exchange traded funds (ETFs) and index funds. Passive investing could be through index mutual funds and ETFs, both of which track the performance of a given index. For example, you could have an index fund that tracks the S&P BSE Sensex and also an ETF.

What is the difference? Units of ETFs can be bought and sold on the stock exchanges, whereas the index fund functions like any other mutual fund with its NAV (net asset value) indicating its value. In the case of ETFs, you mandatorily need to have a demat account and need to invest a minimum of one unit, similar to buying or selling a regular share on a stock exchange through a recognised broker. Index funds are like other MFs in which you can buy units of the index it represents.