Finance · Financial Markets
Exchange Traded Funds (ETFs) have become an increasingly popular investment vehicle in the Indian capital market due to their low cost and transparency. Unlike traditional mutual funds, ETFs are traded on stock exchanges like individual stocks. When an authorized participant or a large investor wants to create or redeem units of an ETF directly with the fund house, they generally do so in a specific manner. Which of the following describes the unique mechanism used for the creation and redemption of ETF units in the primary market?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The investor must borrow the underlying stocks from the stock exchange and hand them over to SEBI for the issuance of ETF certificates.
- 2Units can only be created once a year during the New Fund Offer (NFO) period and cannot be redeemed until the fund is liquidated.
- 3The creation and redemption occur through an 'In-Kind' process where a basket of securities representing the underlying index is exchanged for ETF units.✓
- 4The investor must pay cash directly to the fund house based on the previous day's closing Net Asset Value (NAV).
Correct answer
The creation and redemption occur through an 'In-Kind' process where a basket of securities representing the underlying index is exchanged for ETF units.
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