India’s equity market has been on a sharp slide with the indices, witnessing steep correction over the past month.
While investors are jittery, many fund houses believe the recent correction in the stock prices presents a good buying opportunity for long-term investors. Reliance Mutual Fund is set to launch an exchange-traded fund (ETF) which will track the S&P BSE Sensex Next 50 Index.
Reliance ETF Sensex Next 50 will open for subscription on July 29. The ETF will be listed and traded on the Bombay Stock Exchange.
Investment mandate
Reliance ETF Sensex Next 50 will invest at least 95 per cent of its corpus in the stocks that constitute the S&P BSE Sensex Next 50 Index. Like other exchange-traded funds, the scheme will ensure that the weightage of the stocks is consistent with that of the underlying index.
The balance 5 per cent will be invested in liquid instruments or cash equivalents in order to meet any redemption request by investors. The fund will invest in derivative instruments at the time of change in the underlying constituents for re-balancing purpose. The exposure in derivatives, however, will not exceed 10 per cent.
Though the scheme will invest only in the 50 stocks that constitute the S&P BSE Sensex Next 50 Index and also ensure weightage of these stocks in line with that of the underlying index, there is bound to be a variance in the returns vis-à-vis the underlying index. This variance in returns compared with the underlying index, which is referred to as tracking error, will be due to a variety of reasons such as liquidity on the exchange where it is traded, expense ratio, dividend pay-out or other corporate action.
The fund envisages keeping the tracking error under 2 per cent; this means the difference between the fund and benchmark returns shall not exceed 2 per cent.
Over the past year, the S&P BSE Sensex Next 50 has shed over 6 per cent. On a three-year basis, the index has risen over 10 per cent.
Currently, there are two other ETFs — SBI ETF Sensex Next 50 and UTI S&P BSE Sensex Next 50 ETF — tracking the same index and traded in the BSE. SBI ETF Sensex Next 50, launched in September 2018, has shed 7.24 per cent since inception. UTI S&P BSE Sensex Next 50 ETF, launched in March 2019, has shed 8.2 per cent over the past three months.
The writer is an independent financial consultant