Wednesday 6 July 2011

Why should we be worried about ETF Money entering India

Why should we be worried about ETF Money entering India

Of late, you'd have heard an occasional voice or two talking about a relatively new phenomenon of ETF Money entering Indian Markets.

In India, we don't have too many Exchange Traded Funds (ETFs). We just have a few basic ones - which either invest in Gold or in specific shares which make up the benchmark index in the same proportion as the index.

So, why is there such a brouhaha about ETF money entering India?

The simple reason is that the financial "wizards" of the western world have created literally hundreds of different types of ETFs. Not all of them are simple ones. Certainly, most of them are not only complex, but also

  • Difficult to understand
  • Highly risky
  • Very costly in terms of fund management fees (vis-a-vis our plain vanilla ETFs)
  • Highly unsuited to "ordinary investors"
  • Designed almost specially for very larger institutional investors / HNIs who use it for a whole variety of ultra-short-term, short-term, medium-term and long-term purposes.

With all these ETFs, much of the money invested in such ETFs is considered to be "Hot Money" - which very quickly moves in and out of markets in search of returns.

Do take a look at the following article from Economist.com for an in-depth understanding of how and why ETFs can be dangerous:

Regards,

N


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