What are Exchange Traded Funds (ETFs)?
- ETFs are generally passively managed Mutual Fund schemes that track a benchmark index and endeavour to reflect its performance.
- An ETF trades like a stock on the stock exchanges.
- Most ETFs track a particular index or market benchmark. They aim to comprise the same stocks in the same weightage as present in the index they track.
There are three types of ETFs as follows:
- Equity ETFs
- Debt ETFs
- Commodity ETFs
Benefits of Investing through ETFs:
- Diversification: Investing in an ETF can be a good way of diversifying your investment portfolio into different securities. Equity ETFs based on broad market indices generally have exposure across various sectors of the economy.
- Low Fees: Most ETFs generally charge a low expense ratio as compared with conventional active mutual fund schemes.
- Low Investment Cost: The minimum amount required to invest in an ETF is low. In the case of ETFs, you can buy as low as one unit at the prevailing market price on the stock exchange.
- Tradable: You can buy or sell ETFs through the Stock exchange just like any other equity share. They can also be used as a collateral, bought on margin money and traded using stop and limit orders.
- Transparency in holdings: ETFs disclose their portfolio on a daily basis.
- Real time NAV: Units of ETF can be bought/ sold with the AMC at real time NAV.
- Tax Efficiency*: Returns on investments held in equity ETFs for more than a year are tax free. On the other hand, investments held in fixed income and gold ETFs for more than three years are charged 20% tax after accounting for inflation through indexation.
- Indices based on research and back tested data: ETFs often track indices that are based on extensive research and back-tested data. The indices represent a particular segment or sector of the market and are rebalanced periodically by index providers.
*As per prevailing tax laws, no tax is charged on capital gains made on long-term investments held in equity mutual fund schemes. Units held for more than 12 months as capital assets in an equity mutual fund scheme qualify as long-term investment. On the other hand, units held for 12 months or less as capital assets qualify as short-term investment and are charged 15% tax. Surcharge and cess are also applicable as per the provisions of the prevailing tax laws. Investors are advised to consult their own legal, tax and financial advisors to determine possible tax, legal and other financial implication or consequence of subscribing to any investment.
Our ETF Categories:
Equity ETFs
Exchange Traded Funds comprising equity securities or tracking an equity index are classified as equity ETFs. These can be further classified into:
Largecap ETFs
These ETFs track indices predominantly comprising of largecap stocks. Largecap stocks represent renowned companies that could be among the market leaders in their respective sectors. These companies generally have a noteworthy history and a competitive advantage. They are likely to grow steadily across various market cycles.
Midcap ETFs
These ETFs track indices that represent mid-sized companies having established businesses with a potential to grow over the long term. Midcap investments could have reasonable return potential over the long term.
Multicap ETFs
These ETFs track indices which have exposure across more than one market cap segments. These ETFs offer wide range of opportunities across market capitalizations and may help in diversification of the portfolio.
Strategic / Smart Beta ETFs
A strategic ETF follows a pre-defined investment strategy. A Smart Beta ETF uses both passive and active investment strategies. It passively follows a smart index, which considers smart factors such as valuation and volatility instead of the conventional factor of free-float market capitalisation. This can help investors gain reasonable returns and limit risk.
Gold ETF
These ETFs invest in gold via a set of instruments or securities that are backed by gold.
ETFs vs Index schemes
| Particulars | ETF | Index Scheme |
|---|---|---|
| Intraday Trading | Possible | Not possible |
| Investment/Redemption Decision | Buy/sell decisions can happen at real-time NAV/market price through stock exchanges or through AMCs | Investment/redemption decisions are taken at day-end NAV |
| Liquidity | Can be purchased or redeemed on exchanges or through AMCs. | Can be purchased or redeemed only through AMCs |
| Cost Effectiveness | Each investor bears his or her own brokerage cost at the time of investment or redemption and other investors are not affected by this. | A group of investors bear brokerage costs every time an investment or redemption takes place in the scheme. This can impact long-term returns of investors. |
| Unit holding format | Compulsorily in the demat | Physical or demat form |