NIFTY EXCHANGE TRADED FUNDS

YUVRAJ PATIL

NATIONAL STOCK EXCHANGE 2

ETFs are mutual funds that trade like a stock

Exchange Traded Fund (ETF)

– Simplicity– Transparency– Risk control– Diversification– Open-End Fund

Stock:– On Exchange– Trading flexibility– Trading strategies

+MUTUAL FUND STOCK

EXCHANGE TRADED FUND

NATIONAL STOCK EXCHANGE 3

ETF SETTLEMENT CYCLE

S. No. Day Time Activity

1. T - Trading day

2. T+1 1300 Custodial Confirmation

3. T+1 1430 Final Obligation download

4. T+2 1100 Securities and Funds pay-in

5. T+2 1330 Securities and Funds pay-out

6. T+2 - Auctions for shortages

7. T+3 - Securities Auction & Funds pay-in/pay-out

ETF – A WORLD SCENARIO

NATIONAL STOCK EXCHANGE 5

A BRIEF HISTORY OF ETFs ETFs were launched post the 1987 crash to overcome the lack of liquidity and intense

program trading in the market

The first ETF traded on a U.S. exchange was StateStreet’s SPDR (SPY), which was

introduced in 1993. SPY tracks the S&P 500 Index and is currently the most heavily-

traded security in the world.

Due to popularity of indexing in the 1990s, ETFs soon became popular amongst individual

investors and financial advisors as a transparent and liquid method of indexing which was

also better than index mutual funds

As the availability of ETFs grew for different asset classes, investment styles and

geographic sectors, it made possible for investors to construct a well diversified portfolio

at a very low cost

NATIONAL STOCK EXCHANGE 6

GLOBAL ETF MARKET

Source: http://www.blackrockinternational.com

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

$0.80

$1,677

3

4542

ETF Assets # Total ETFs

Ass

ets

(USD

Bn)

NATIONAL STOCK EXCHANGE 7

ASIAN ETF MARKET

Source: http://www.blackrockinternational.com

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012$0

$20

$40

$60

$80

$100

$120

0

100

200

300

400

500

600

$10

$111

12

491

ETF Assets # Total ETFs

USD

Bill

ion

NATIONAL STOCK EXCHANGE 8

KEY BENEFITS OF ETF

• The challenging market conditions in 2008-09 caused a significant shift in investors’ risk appetite and in their desire for liquidity. ETFs met their need for greater transparency regarding cost, holdings, price, liquidity, product structure, and risk and return.

Diversified Exposure To Market

Buy And Hold Investing

Active Trading Alternative To Futures*

Cost Advantage

Broad Market Access

Easy to Implement

any Inv. Strategy

Core/Satellite Investing

Hedging

* For ETFs in US markets where the underlying is futures

NATIONAL STOCK EXCHANGE 9

FACTORS DRIVING ETF GROWTH

1

2

3

4

5

6

Large variety of indices of Equity, Fixed income, Commodity and other covered by ETFs

Facilitation of investor education & trading by large broking houses

Special market campaigns by many on-line brokers in an effort to win new accounts and cross-sell other products

Major fund platforms embracing ETFs

Regulatory changes in the US, Europe and many emerging markets that allow funds to make larger allocations to ETFs

Development and growth of investment styles that employ products like ETFs that deliver low cost beta

ETF – THE INDIAN STORY

NATIONAL STOCK EXCHANGE 11

INDIAN ETF MARKET

* Average Quarterly AUM Source www.amfiindia.com

Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-120

2000

4000

6000

8000

10000

12000

14000

0

5

10

15

20

25

30

35

40

9886

1607

AUM Gold ETF AUM Other ETF

#ETF

Asse

ts (I

NR

Cror

es)

NATIONAL STOCK EXCHANGE 12

ETFs IN INDIA

• Gold ETF

• Liquid ETF

• Index ETF

– Nifty

– Junior Nifty

– Bank Nifty

– PSU Banks

– Shariah

• International Index ETF

– Hang Seng

– S&P CNX 500

NATIONAL STOCK EXCHANGE 13

ETFs: BENEFITS FOR THE RETAIL INVESTOR

1

2

3

4

5

Very Simple to Trade: Can be traded on NSE like any stock

Quick Diversification: Opens up multiple asset classes are affordable costs

Economical: Lowest expense ratio amongst all equity mutual funds

Only brokerage payable in buying or selling on exchange

You can track your investment value in real time

Safe

Simple

Fast

NATIONAL STOCK EXCHANGE 14

TYPICAL INVESTMENT PATTERN

Fixed Income Investment

Equity Investment

Bank Savings

Account

Fixed Deposits

Provident Funds

Cash Holdings

Few Stocks or Mutual

Funds

• This is a typical salaried individual’s investment pattern

• As we can see it is heavily tilted towards fixed income products, including his retirement savings

• This lopsided investment pattern exposes the individual to the risk of inflation and inefficient utilization of his assets

• There is a strong need to rebalance the portfolio to improve the returns and counter the risk of inflation

NATIONAL STOCK EXCHANGE 15

CORRECTING THE INVESTMENT TILT

• The best way to correct this is – To participate in the economic growth by a broad

exposure to the Indian markets– To include gold in portfolio to hedge against the

inflationary pressures– To insure against distress situations by investing in gold

• The Nifty 50 offers you an avenue to participate in the growth of Indian economy and benefit from the same

• Nifty ETF is a simple and economical way to invest in the Nifty

• Gold investment is at its simplest with Gold ETFs• They allow investors to accumulate pure gold as

and when they are ready for it.

NIFTY ETF

GOLD ETF

SAFE SIMPLE SECURE

NIFTY ETF

NATIONAL STOCK EXCHANGE

NIFTY ETF

– Blue chip stocks

– Well diversified

– Highly liquid

– Represents Indian business economy

Why NIFTY?

– Direct investment in benchmark index

– Lower Cost

– More Transparency

– More Flexibility

– Small ticket size

Why NIFTY ETF?

19911992

19931995

19961997

19992000

20012003

20042005

20072008

20092011

0

1000

2000

3000

4000

5000

6000

7000S&P CNX Nifty

Nifty ETF is the simple and safe way to access equity markets

17

NATIONAL STOCK EXCHANGE

NIFTY ETF: A COMPARISON

Narrow Broad Broad

High Low Low

Low High Low

High Low Low

Market Rates NAV at EOD Market Rates

Yes No Yes

No May Be Yes

Yes No Yes

STOCKS NIFTY MUTUAL FUND

NIFTY ETF

EXPOSURE

VOLATILITY

EXPENSE

CAPITAL REQ

PRICE

ARBITRAGE

MARKET RETURNS

INTRADAY TRADING

18

NATIONAL STOCK EXCHANGE 19

NIFTY ETF: KEY BENEFITS

1

2

3

4

5

6

Simple: Can be traded on NSE like a stock

Instant Diversification: Single scrip to trade in a broad Indian market

Economical: Lowest expense ratio amongst all equity mutual funds

Auto Balancing: No need to rebalance portfolio after corporate actions

No costs other than brokerage are payable in buying or selling on exchange

You can track your investment value in real time

Safe

Simple

Fast

NATIONAL STOCK EXCHANGE 20

NIFTY ETF – SPECIFICATIONS

Type of fund Equity ETF

Investment In basket of securities replicating the S&P CNX NIFTY index

Taxation treatment Equity

Pricing per Unit ~ 1/10th of Index

Tick Size INR 0.01

Minimum Lot (on Exchange) 1 unit

Minimum Lot (Direct) 10000 units

Expense Ratio ~ 0.50 %

Trading hours Same as cash market

Price Market determined, tracks NAV

Trade cycle T+2

Allocation Pattern

Securities covered by S&P CNX Nifty Index Upto 100%

Money market, securitized debts, bonds and cash at call 0 – 10%

THANK YOU

ANNEXURES

NATIONAL STOCK EXCHANGE 23

Annexure 1: The Unit Creation of an ETF

CREATION UNIT

Creation Unit

=

Portfolio Deposit

+

Cash Component

1 Cash Component will represent accrued Dividends, accrued annual charges including management fees and residual cash in the Scheme. It will also include transaction cost as charged by the Custodian/ Depositary Participant, equalization of Dividend and other incidental expenses for Creating Units. It will also include Entry Load, as may be levied by the Fund from time to time and statutory levies, if any.

A pre-defined basket of Securities that represent the underlying index or gold as announced by the Fund on daily basis

The Cash Component represents the difference between the Applicable NAV of a Creation Unit and the market value of the Portfolio deposit.

UNIT CREATION PROCESS

The requisite Securities or gold constituting the Portfolio Deposit of the scheme have to be transferred to the Fund’s DP account (or vault) while the Cash Component has to be paid to the Custodian/AMC

On confirmation of the same by the Custodian/AMC, the AMC will transfer the units of the Scheme into the investor’s DP account

A fixed number of units of the scheme, which is exchanged for a basket of shares underlying the index(or gold) and cash

NATIONAL STOCK EXCHANGE 24

Structure of an ETF

Redemption

PRIMARY MARKET SECONDARY MARKET

Authorized Participants & Large Investors

ETF Issuer

Buyer

Exchange

Seller

Buy & Sell

Market Making

Arbitrage

Creation

Cash

ETF Units

Cash

ETF Units

* Creation & Redemption of ETF units is done only in integral multiples of creation units.

NATIONAL STOCK EXCHANGE 25

The NAV of an ETF

Market Value or Fair Value of Schemes Investments

Net Current Assets (including accrued expenses)+

Number of Units Outstanding as on Valuation Date

NAV (INR) =

NAV COMPUTATION

Note for Valuation for Gold:

The gold held by the Scheme shall be valued at the AM fixing price of London Bullion Market Association (LBMA) in US dollars per troy ounce for gold having a fineness of 995.0 parts per thousand, subject to the following

adjustment for conversion to metric measures as per standard conversion rates

adjustment for conversion of US dollars into Indian rupees as per the RBI reference rate