Index and exchange-traded funds (ETF) is presently lying as an unusual object in the Rs 6.65 trillion Indian mutual funds (MF) industry with the launch of the passively-managed funds like this.

Kotak Mahindra Asset Management Co. Ltd has launched its first ETF on the National Stock Exchange, its second diversified ETF otherwise.

It is called Kotak Nifty ETF, this scheme will be recognized as a benchmarked against the 

Nifty index. Each unit of this ETF is subject to approximately one-tenth of the daily value of the CNX Nifty index.

ETFs can be generally described as close cousins of index funds. Funds like these are “passively benchmarked against an index and invest in all the stocks, in exactly the same proportion, as they lie in the benchmark index.”

In contrast with index funds, ETFs are listed on the stock markets and you need a de-mat account to buy ETF units. 

ETFs are only available on the stock exchanges. Benchmark Asset Management Co. Pvt. Ltd, 

India's only fund house that specializes in managing these funds, had launched India's first ETF in 2002.

Gold ETFs has been launched when gold prices were comparatively more popular.

As per the Association of Mutual Funds of India (Amfi) data, “gold ETFs constitute Rs1, 352 crore, or 0.20% of the industry's total assets under management, while other ETFs (benchmarked to equity market indices) constitute a poor Rs1, 031 crore, or 0.16%.”

Lakshmi Iyer, head (debt funds), Kotak Mahindra AMC, says: "The ETF market is pretty nascent--only about 1-2% of India's population has de-mat and trading accounts, which are required if you want to invest in ETFs. But as investing in funds through stock exchanges pick up, ETFs will gain popularity."

But now equity markets have shown extreme bouts of volatility, especially in 2008 and 2009, therefore investors are slowly beginning to realize the importance of having at least one ETF in the portfolio.

For instance, the average number of units of Benchmark Nifty BeES (India's first ETF) and 

Benchmark Junior BeES in 2009 were 1.45 lakh and 41,886 units, up from 72,000 and 8,083 units, respectively in 2008. In 2008 and 2009, both these ETFs saw an increase of over 100% in trading volumes.

Source: Livemint