MUMBAI: The Securities and Exchange Board of India (Sebi) has recommended that mutual fund houses appoint at least two market makers to provide two-way quotes to investors in passive funds — ETFs or index funds — in a move to improve the liquidity in such funds.
Retail participation in ETFs tends to be low because of the wide bid-ask spreads. By appointing market makers, who can provide thin buy-sell spreads, asset management companies or AMCs can attract more retail investor interest toward passive funds.
A passive fund, unlike an active fund, mimics the underlying index like Nifty or Bank Nifty or a debt index. The investor returns are based on how the underlying index moves. “Considering the emergence of passive funds ….as an investment product for retail investors globally and various advantages of passive investing like transparency, diversification, lower cost vis a vis active funds, a need was felt to review the regulatory framework for passive funds in India,” a Sebi circular of May 23 read.
MF investors looking for tax savings can also avail of a passive equity-linked saving scheme or ELSS. However, fund houses launching such schemes can launch either an active ELSS scheme or a passive ELSS scheme.
Debt ETFs or index funds could be based on indices comprising corporate debt securities or government securities, t-bills and or state development loans or a combination of corporate debt securities and G-sec/t-bills/SDLs(hybrid indices).
These securities can be held to maturity, which provides investors who don’t churn their portfolios actively an attractive proposition to invest in debt for stable returns.