Before we delve into the discussion of redemption, let’s understand what ETF’s and Mutual Funds are.
Electronically Traded Funds (ETF)
ETF’s or Electronically Traded Funds are similar to index funds and can be bought and sold like stocks on a regular basis. It is an easy method for investors to buy a wide range of securities in a single go. An ETF can hold assets like commodities, stocks and even bonds. With lower costs and tax efficiency, it has become a preferred investment option for Indian buyers. When a person invests in ETF’s, they are investing in the set of underlying securities, which represent a particular index.
ETF’s are very much like mutual funds in many ways. ETF’s also has a net asset value or NAV that is determined at the end of each day. The price of an ETF is determined through the market forces of demand and supply, just like any other commodity.
Owing to the development of the investment sector, mutual funds have become a commonly traded security in India. The mutual fund, as the name suggests is a pool of money invested in by a number of people. The capital is collected by a wide range of investors and then invested in various securities like shares, bonds, and stocks. Mutual funds allow higher returns and larger portfolio making it an ideal investment alternative.
ETF’s like Liquid bees receive a daily dividend on the amount invested, which is generally reinvested in the same scheme at the end of the day. Due to this pattern, the number of units held turn out to be in decimals, up to three decimal places. Hence, this process of dividends leads to the formation of fragmented units of ETF’s or mutual funds.
Although it must be noted that an investor can only trade in units, with 1 unit being the minimum. It is not possible to trade fractional units on the National Stock Exchange or NSE. Since the majority of the dealings take place online, the ETF’s or mutual funds are reflected in the Demat account only, without the involvement of physical form. In a Demat account, it is entirely possible to store fractional units. And, if you are regularly dealing in this stock, it becomes relatively convenient for you. These fractions can keep on accumulating over a period of time.
But, when and if you decide to sell the units, you can only trade for the whole units and not fractions. So, if you are worried about what to do with these stocks, fret not. Asset Management Companies (AMC) provides an easy option for buyback of these fractional units. An investor can avail this option of buy back at any time during the course of their dealings and also acts like an exit option to provide liquidity to investors.
The process of Buyback
The buyback is processed on the first working day of the week and involves an easy and effective process.
- The first step to avail the option of the buyback is to fill in a DIS slip. A DIS slip stands for Delivery Instruction Slip, which involves all the necessary information. This off-market slip is then given to the Depositary Participant, who is responsible for managing the accounts and dealing on behalf of their clients. To those who are unaware, an off-market transaction does not involve an intermediary like a broker and is settles directly between two Demat accounts.
- Once the Depository Participant has received the instructions via the DIS slip, they can further process it. A DP transfers the fractional units from the Demat account of the investor directly to the Demat account of the respective scheme. The receiving account can also be called as the Target account.
- Following this AMC plays a crucial role. AMC stands for Asset Management Company. The registrar or AMC then keeps a tab on the transferred units in the Target account. When these units come in the attention, they are considered for redemption on the very day of receipt of these fractional units in the target scheme account.
- Lastly, to complete the process the registrar avails the bank details of the unitholder from the database, and then the amount of the said transaction is deposited directly into the account of the investor, thus settling the transaction smoothly.
Electronically traded funds have a myriad of advantages. Primarily, the involvement of front and back loads is zero, and also there are not many expenses involved. In addition to low cost, an investor can also reap in the benefits of tax exemptions. An investor can avail benefits on ETF by reducing the tax burden since they are paid in shares of stock and not cash.
It is an undeniable fact that trading in ETF and mutual funds have become popular in India during the last few decades. Even though they are much different, people often like the two. ETF has gained a much stronger hold on the market. With ETF it is easier to determine the price since it is traded at real-time prices instead of closing for the end of the day. Along with that, one can easily venture into equity without being exposed to the risk of the market, making it a much-preferred investment option.
Hope we have answered all your queries regarding ETF , Mutual Funds, its fractional units, and their redemption. Just make sure to study the market well before stepping into it, to be aware of the consequences and to reap in the benefits.