The future of ETFs looks bright in India. It is up to the MF industry to tap the potential opportunities that lie ahead in promoting this innovative investment product.

An Exchange Traded Fund (ETF) is a hybrid investment option that combines the features of an index fund as well as stocks. Unlike index funds, ETFs are listed on the stock exchanges and their prices are linked to the underlying index. ETFs can be bought and sold like any other stock on an exchange. Therefore, one can invest at real-time prices as against the end of the day prices as is the case in open-ended schemes. Besides, there is no paper work involved for investing in an ETF.

As regards their functioning, the `Authorized Participants' play a significant role in the ETFs running efficiently. These authorized participants are the entities chosen by the Asset Management Companies (AMCs) and are usually large institutional organizations such as market makers. They deposit all the stocks that comprise the index in the case of an Index ETF or gold in the case of Gold ETF with the depository and receive `Creation Units' in exchange. The exchange of ETF units and the securities they represent, between the AMC and the Authorized Participants, is an `in-kind exchange' as there is no exchange of cash. These creation units are usually a large block which are then split into smaller units by the Authorized Participants and then sold or bought at the stock exchanges. The same process is followed for creation of additional units, as and when required.

The Analyst Magazine, Exchange Traded Funds, ETFs, Investment Products, Stock Exchanges, Asset Management Companies, AMCs, Foreign Market Index, Foreign Currencies, Mutual Funds, Systematic Investment Plan, SIP, Equity Markets, Investment Portfolios, Secondary Market, Investment Strategy.