What is the news?

SEBI has instructed mutual fund houses to halt new inflows into schemes investing in overseas exchange-traded funds (ETFs) from April 1, 2024.

What are Exchange Traded Funds (ETFs)?

• ETFs are marketable securities that track various assets, including indices, commodities, or bonds, and trade on stock exchanges like regular stocks.
• ETFs were started in 2001 in India.
• Types of ETFs: Equity ETFs, bonds ETFs, commodity ETFs, international ETFs, and sectoral/thematic ETFs cater to diverse investment preferences.

Market dynamics of ETFs

• ETFs can be purchased or sold on a stock exchange in the same way that regular stocks can, unlike the mutual funds.
• The traded price of an ETF changes throughout the day like any other stock, as it is bought and sold on the stock exchange.
• The trading value of an ETF is based on the net asset value of the underlying stocks that it represents.
• These funds offer higher liquidity, lower fees, and tax efficiency compared to traditional mutual funds, appealing to individual investors.

Reasons behind SEBI’s Directive

• Cap Proximity: The mutual fund industry has nearly reached 95% of the $1 billion investment limit in overseas ETFs, prompting SEBI’s intervention.
• Temporary Measure: SEBI’s directive aims to temporarily curb inflows into these schemes until the investment limit is revised or additional measures are implemented.
• Existing Caps: Currently, mutual funds are subject to an overall cap of $7 billion for investments in overseas stocks or mutual funds, with a specific limit of $1 billion for ETFs.

PYQ:

2013: The product diversification of financial institutions and insurance companies, resulting in overlapping of products and services strengthens the case for the merger of the two regulatory agencies, namely SEBI and IRDA. Justify.

2020: With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic?

1. It is the investment through capital instruments essentially in a listed company.
2. It is a largely non-debt creating capital flow.
3. It is the investment which involves debt-servicing.
4. It is the investment made by foreign institutional investors in the Government securities.

Practice MCQ:

With reference to the Exchange Traded Funds (ETFs), consider the following statements:

1. ETFs are marketable securities that track various assets, including indices, commodities, or bonds, and trade on stock exchanges like regular stocks.
2. ETFs were started in 2021 in India.
3. ETFs can be purchased like the mutual funds.

How many of the given statements is/are correct?

1. One
2. Two
3. Three
4. None

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