They can be traded in the exchange. They offer limited risk as compared to direct equity. In India, liquidity is an issue for them and many MF schemes give better returns. Therefore they are not very popular.
Exchange Traded Funds (ETFs) are products that invest in a basket of stocks. They can be based on a basket of stocks of a sector, an Indian market index, a commodity or even international indices. In case, it is based on an index, the weightage given to different stocks may be the same as they are in the underlying index or different. They are listed and traded in exchanges. For example, SBI ETF Nifty 50 is an ETF that invests in the 50 stocks of the Nifty index. The Reliance ETF PSU Index is based on the Nifty PSU Bank Index. There are many Gold ETFs in India. These are based on gold prices.
2. What are the features of ETFs?
- ETFs have a net asset value (NAV) just like a Mutual Fund scheme. NAV is the unit price at the end of the day. The price is based on the Net Asset Value of the underlying stocks that it corresponds to.
- You can trade ETFs in real time. The trades are done on an indicative NAV (iNAV) provided by the fund, The iNAV is the real-time NAV of an ETF. iNAV may or may not be different from the market price.
- When you trading in an ETF, you have to pay brokerage.
ETFs – What, Why, How
You need to have a demat account wherein you can buy and sell ETFs. ETFs can be purchased from the Fund house also. ETFs can be traded in multiples of one.
As an investor, you can buy on the exchange and sell to the Fund. You can sell on the exchange after buying from the Fund.
4. What are the advantages of investing in ETFs?
If it is an Index ETF, you can sell and buy at real-time prices rather than at the end of the day as is the case with an index based mutual fund.
Investing in ETFs is a good way to get into the equity market. The risk is less compared to investing in direct equity. The risk of fund manager competence and discretion is also eliminated as Index ETFs mirror the index movement and commodity ETFs mirror the commodity prices.
5. What are the disadvantages of investing in ETFs?
The number of transactions in ETFs are lower. So liquidity is less and it might not always be easy to buy/sell them on the exchange. In this case, you might have to pay a higher price to buy or sell at a lower price compared to the price in the market.
There is brokerage cost, fund management charges and taxes that the investor has to incur.
6. What are the tax implications of investing in ETFs
The tax implications are similar as those in case of buying and selling mutual fund schemes. Short term gains are taxed at 15% and long term gains are non-taxable for index ETFs funds and sector specific funds. For other ETFs, it is 10% without indexation and 20% with indexation. It is better to confirm with the fund house regarding taxation.
7. What happens to the ETF and my investment when the securities in the underlying index change?
If the securities in the underlying index are changed, the ETF would change the securities in its portfolio. This will not affect the investor too much as the ETF units will continue to be based on the index.
8. Should I buy ETFs?
Investment in ETF is a good way especially for conservative investors to invest in the stock market as the risks are lower. It helps in diversifying the portfolio.
But liquidity is an issue and the returns will be limited compared to stock markets.
The management fess are lower compared to MFs as churn is lower. But many MF schemes in India give better returns than ETFs.
You should understand your investment requirements, check the ETF's investment objectives and performance and then decide if you need to invest in the ETF.