The Insurance Regulatory and Development Authority (IRDA) released a draft on allowing investment in Equity Exchange Traded Funds (ETF). This step is considered as a crucial step towards achieving disinvestment target.
The Government plans to meet this target by transferring shares in public sector companies to Equity ETFs. It is expected that there will be around 11 PSUs in the Equity ETFs and by selling shares, the government would reduce volatility in PSU stocks.
The Draft guidelines are:
• Equity ETFs would be restricted to the schemes of Mutual Funds that are registered with Securities and Exchange Bureau of India (SEBI) and governed by SEBI (Mutual Funds) Regulations, 1996.
• Any investment in the Equity ETF would be considered as investment in mutual funds.
• Equity ETFs would come under current exposure norms applicable to investment in mutual funds.
• Equity ETFs in mutual funds should be registered with the SEBI.
• Equity ETFs cannot hold more than 15% of fund in a single company and needs to ensure that total exposure to a sector cannot be more than 30%.
• Equity ETF should be listed on at least two Exchanges having nationwide terminals and should not have any overseas investments.
Equity ETFs are those funds whose unit price is derived from basket of underlying equity shares. These baskets of securities differ depending upon the nature of ETF.
The main difference between ETFs and other types of index funds is that ETFs don't try to outperform their corresponding index, but simply replicate its performance. The advantage of using ETFs is that ETFs combine the range of a diversified portfolio with the simplicity of trading a single stock.
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