What are Exchange-Traded Funds (ETFs)?

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The total investment by the Employees’ Provident Fund Organisation (EPFO) in exchange-traded funds (ETFs) in more than seven years has crossed Rs 2.5 trillion, Minister of State in the Labour Ministry recently told Lok Sabha .

About Exchange-Traded Funds (ETFs)

  • An ETF is a collection of marketable securities that tracks an index, a commodity, bonds, or a basket of assets.
  • In simple terms, ETFs are funds that track indexes such as CNX Nifty, or BSE Sensex, etc.
  • An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies.
  • ETF funds are somewhat similar to mutual funds in terms of their structure, regulation, and management. Additionally, just like mutual funds, they are a pooled investment vehicle that offers diversified investment into various asset classes like stocks, commodities, bonds, currencies, options, or a blend of these.
  • Unlike mutual funds, ETFs can be purchased or sold on a stock exchange in the same way that regular stocks can.
  • The traded price of an ETF changes throughout the day like any other stock, as it is bought and sold on the stock exchange. 
  • The trading value of an ETF is based on the net asset value of the underlying stocks that it represents.
  • ETFs typically have higher daily liquidity and lower fees than mutual fund schemes, making them an attractive alternative for individual investors.

Key Facts about Employees Provident Fund Organisation (EPFO)

  • It is a statutory body under the Employees' Provident Funds and Miscellaneous Act, 1952. 
  • It is under the administrative control of the Union Ministry of Labor and Employment. 
  • Structure of EPFO:
    • The Act and all its schemes are administered by a tripartite board called the Central Board of Trustees.
    • The board comprises representatives of the Government (both Central and State), employers, and employees. 
    • The board is chaired by the Union Minister of Labour and Employment, Government of India. 
  • The Central Board of Trustees operates three schemes:
    • The Employees’ Provident Funds Scheme, 1952 (EPF)
    • The Employees’ Pension Scheme, 1995 (EPS)
    • The Employees’ Deposit Linked Insurance Scheme, 1976 (EDLI)
  • EPFO is also the nodal agency for implementing Bilateral Social Security Agreements with other countries on a reciprocal basis. 
  • Coverage: The schemes offered by EPFO cover Indian workers and international workers (from countries with whom the EPFO has signed bilateral agreements).

Q1) What are mutual funds?

A mutual fund is an investment option where money from many people is pooled together to buy a variety of stocks, bonds, or other securities. This mix of investments is managed by a professional money manager, providing individuals with a portfolio that is structured to match the investment objectives stated in the fund's prospectus.

Source: Investment by EPFO in ETFs crosses Rs 2.5 trillion: Rameswar Teli to LS