Buying and selling NiftyBeES is as simple as trading stock securities. Any NSE terminal can be used to purchase and sell at current market prices. Nifty BeES’ underlying portfolio closely resembles the S&P CNX Nifty. The NiftyBeES program is a no-load program. To put it another way, all expenses, including management fees, do not exceed 0.80% of Daily Average Net Assets. The fee ratio is one of the lowest of any mutual fund scheme. Furthermore, for assets worth more than INR 500 crore, the expenses are as low as 0.65%.
Convenience and Liquidity
The NiftyBeES is a stock that is traded on the stock exchange (NSE). As a result, it can be purchased at any time during the day’s trading hours. Investors might act rapidly to seize an opportunity and even place limit orders. Nifty BeES assets can be held in a DP account alongside other portfolio holdings. The very nature of the Nifty BeES promotes liquidity. Buying and selling by investors, arbitrage by authorized participants with the actual shares, and arbitrage using index futures are only a few examples. As a result of the large trade volume, the investor has plenty of liquidity.
Neutral and Transparent
This ETF is free of fund management bias. In other words, the performance of these funds is determined by the S&P CNX Nifty Index as well as market demand and supply. And not on the study and analysis of the fund management. Because the Nifty BeES is a replication of the S&P CNX Nifty, unit holders may always see where and how much money is put in a particular stock.
Diversification and Equitable Structure
One unit of the mutual fund provides exposure to fifty S&P CNX Nifty equities. As a result, it provides a strong risk and diversification spread. Nifty BeES features a unique “in-kind” purchasing and selling process that involves swapping a pre-defined portfolio. Unlike other open ended mutual funds, investors in this long-term fund are not charged for short-term trading. To put it another way, it protects long-term investors from short-term trading.
Which ETF is the best for Nifty?
The SBI ETF IT, with a one-year return of 60.88 percent, the Nippon India ETF Nifty IT, with a one-year return of 60.74 percent, the ICICI Prudential IT ETF, with a return of 60.52 percent, the ICICI Prudential Midcap 150 ETF, with a return of 46.2 percent, and so on are some of the best exchange-traded funds to invest in India.
1) What exactly is an ETF (Exchange Traded Fund)?
A financial investment called an Exchange Traded Fund (ETF) monitors or mimics the performance of an underlying asset. An equities index, gold or other commodities, bonds, or other assets can be used as the underlying asset. The performance of the underlying asset, also known as the benchmark, is mirrored by the ETF. If the benchmark is an index, such as the Nifty 50, the ETF will invest in all index assets in proportion to their weighting in the index.
2) What are the various types of exchange-traded funds (ETFs) available in India?
Equity ETFs, gold ETFs, debt ETFs, and overseas ETFs are all available in India.
- ETFs that track the performance of a stock index are known as equity ETFs. The index can be the Nifty 50 (e.g., SBI ETF Nifty 50), a broader index like Nifty Midcap 150 (e.g., Nippon India ETF Nifty Midcap 150), a sectoral index like Nifty Bank (e.g., Kotak Banking ETF), or a thematic index like Nifty India Consumption (e.g., Nippon India ETF Consumption), and so on.
- Commodity exchange-traded funds (ETFs): An ETF that tracks the performance of a commodity, such as gold, is known as a commodity ETF. Birla Sun Life Gold ETF, SBI Gold ETF, Axis Gold ETF, and others are examples of gold ETFs.
- Debt ETFs are exchange-traded funds that track the performance of debt securities. Bharat Bond ETF April 2030, which tracks the performance of the Nifty Bharat Bond Index, LIC MF G-Sec Long Term ETF, which tracks the performance of the Nifty 8-13 year G-Sec Index, DSP Liquid ETF, which tracks the performance of the Nifty 1D Rate Index, and so on are some instances of debt ETFs.
- International ETFs: An international ETF follows the performance of a foreign country’s index. MOSt Shares NASDAQ 100, which tracks the Nasdaq 100 Index, and Nippon India ETF Hang Seng BeES, which tracks the Hang Seng Index, are two examples.
3) How do you go about purchasing ETFs?
Asset management firms offer exchange-traded funds (ETFs) (AMCs). ETFs can be purchased directly from the secondary market or at the time of the New Fund Offering (NFO).
- The dates for the New Fund Issuing (NFO) are announced by the AMC that is offering the ETF. Fill out the application form to become a member of the ETF. The AMC will distribute ETF units after the NFO closes.
- The ETF units are listed on stock exchanges like the BSE and NSE when the NFO closes and the allotment to subscribers is completed. ETF units are traded in the same way as stock shares are traded during market hours. You can purchase ETF units through your stockbroker by using your trading account to place an order.
4) Do ETFs require a demat account?
Yes, if you want to invest in ETFs, you’ll need a demat account. A buy order can be placed from your trading account. The transaction amount will be debited from your trading/bank account during the settlement procedure, and the ETF units will be credited to your demat account. You must issue a sell order from your trading account to sell ETF units. The ETF units will be debited from your demat account during the settlement process, and the transaction amount will be credited to your bank/trading account.
5) What are the main benefits of ETFs?
- Low expense ratio: When compared to active mutual fund schemes, ETFs have a low fee ratio. The charge ratio for most active mutual fund schemes will be between 1.5 and 2.5 percent. The expense ratio of an ETF, on the other hand, is usually less than 1%.
- In some mutual fund schemes, the net asset value (NAV) at the end of the day is applied to the units you buy. In the case of ETFs, however, unit trading occurs in real time during market hours. You will know the price at which your transaction was completed as soon as it is completed.
- Diversification: ETFs that track larger indices, such as the Nifty 50, provide exposure to a basket of 50 equities. The Nifty 50 stocks cover more than 20 distinct economic sectors. As a result, ETFs provide diversification, which is crucial for every investor.
- Low minimum investment: When purchasing or selling ETFs, the minimum amount to purchase or sell is one unit. As a result, the minimum investment amount for ETFs is quite low, making them accessible to consumers of all income levels.
- No fund management bias: In an active fund, the fund manager chooses which securities to purchase, how many to purchase, when to purchase, at what price to purchase, and so on. All of these choices are made by the fund manager. Human decisions can be skewed and have a negative impact on the scheme’s profits. In the case of an ETF with a benchmark such as the Nifty 50, however, the fund manager must invest the ETF money in all of the Nifty 50 members according to their weightage. This eliminates “fund management bias” because they have no say in which securities to acquire, how many to buy, when to buy, at what price, and so on.
6) What are some of the ETF’s drawbacks?
- Investing in ETFs necessitates the use of a demat account, which is not the case with other mutual fund schemes. Account opening and annual maintenance fees are included in the cost of a demat account. You’ll also have to pay brokerage to execute ETF buying and selling orders.
- Modest liquidity: In the case of some ETFs, trading volumes are low. Due to poor liquidity, you may have to pay a premium to NAV when purchasing ETF units. Similarly, due to insufficient liquidity, you may have to sell ETF units at a discount to NAV when selling them.
- Active mutual fund schemes do not have a SIP mode of investing; nonetheless, you can invest in them using systematic investment plans (SIPs). The SIP manner of investment is not accessible with ETFs, however. You must purchase ETF units from the market by submitting an order from your trading account whenever you want to invest in them.
7) What aspects should one think about when investing in an ETF?
- Cost ratio: When deciding between two ETFs that track the same benchmark, such as the Nifty 50, the ETF with the lower expense ratio should be preferred. The rule of thumb is that the lower the cost-to-income ratio, the better.
- A tracking error occurs when an ETF’s returns do not perfectly match the benchmark’s returns. It occurs because the fund management may keep some cash on hand to cover day-to-day expenses. The tracking error is the difference between the benchmark and the ETF returns. When choosing between two ETFs that track the same benchmark, such as the Nifty 50, the ETF with the lesser tracking error should be preferred. The lower the tracking error, the better, is the general rule.
- Assets Under Management (AUM): An ETF with a higher AUM is preferable. Larger schemes may see less volatility. When selecting ETFs for investing, however, you should always prioritize expense ratio and tracking inaccuracy over AUM.
8) What are some of the ETFs accessible for investment in India that are based on various indices?
A list of ETFs based on various indexes that are available for investment in India is as follows:
Can I invest in the Nifty 50 ETF?
The NIFTY 50 Index is regarded as the barometer of the Indian stock market, accounting for around 65 percent of the free float market capitalization of NSE-listed stocks. ETFs Units can be bought and sold like any other equity share on the Stock Exchange using a stockbroker.
Is it possible to buy ETFs directly?
ETFs, like any other stock on the exchange, can be purchased and sold at any time during market hours. Typically, the trading price is close to the fund’s real net asset value (NAV). Investors in ETFs, on the other hand, must have stock trading and demat accounts. 2.
What is the procedure for purchasing an index ETF?
- Many investors conflate ETFs and index funds, which is incorrect. Despite the fact that they have some similarities, investors must be aware of the distinctions. The most significant distinction between an index fund and an exchange-traded fund is that index funds are mutual fund schemes that do not require a demat or share trading account because they are not traded on a stock exchange. Index funds can be purchased directly from the asset management company (AMC) or through an MFD, just like any other mutual fund scheme. To invest in ETFs, though, you’ll need a demat and share trading account.
- Index funds are more expensive than ETFs. There is no securities transaction tax (STT) when you buy ETFs, but there is one when you sell them. You must also pay brokerage every time you purchase or sell an ETF. In addition to STT and brokerage fees, investors must pay for a demat account in order to hold ETFs in electronic form. Index funds are available for purchase in the same way as other mutual funds, but their expense ratio is slightly greater than that of exchange traded funds.
How do I purchase an ETF in India?
ETFs (exchange-traded funds) are a popular type of passive investment all around the world. In India, ETF investing is still in its infancy. What is an ETF and how does it work? The ETF’s sponsor, the fund AMC, will allow institutions to subscribe to their ETF portfolio by purchasing shares that represent the Nifty (in case of a Nifty ETF). The total corpus is then turned into tiny units and offered to retail investors in the same proportion as the Nifty components in the index. These are the units that are exchanged on stock exchanges.
ETFs are divided into four groups. Index ETFs that track the Nifty or the Sensex are available. Second, there are gold ETFs that are linked to the price of gold on the market. Finally, sectoral or theme ETFs are benchmarked against a basket of companies in a specific industry. Finally, there are foreign ETFs that invest in funds outside of the United States, Europe, or Japan. These are typically funds sponsored by their parent company situated in the United States, Europe, or Japan.
ETFs, like any other stock, are listed and traded on stock markets. There are buyers and sellers, and the price is set according to supply and demand. Every ETF will be granted a unique ISIN number, allowing you to hold these ETFs in your demat account in the same way that you hold other shares and securities.
What is the ETF sponsor’s plan for the funds? An equivalent amount of gold is stored in a gold custodian bank when you invest in gold ETFs. One of the most well-known gold custodian banks is the Bank of Nova Scotia in Canada. That implies the physical gold in the custodian bank’s vaults is fully backed by your gold ETFs. E-Gold, on the other hand, does not necessitate the use of a vault.
When compared to mutual funds, ETFs offer a substantially lower expense ratio. Expense ratios for Indian mutual funds range from 2.5 percent to 3.0%, whereas an ETF will have an expense ratio of less than 1%. ETFs are also exchanged like stocks between buyers and sellers, unlike an equity fund or an index fund. The AMC is not required to issue new units or redeem existing units.
ETFs are a good way to diversify your investments. However, there are three hazards associated with ETFs that you should be aware of. To begin with, this is a market product, which means it is subject to market changes. Although trading begins at the suggested NAV, actual prices may vary depending on market conditions. Second, ETF bid-ask spreads may expand, increasing your risk. Finally, there is a chance that your ETF will not accurately reflect the underlying index due to tracking mistake (in case of index ETFs).
Every ETF will have an indicative NAV, which will be used to trade the ETF. You can buy an ETF directly from your online trading terminal, depending on market conditions. For example, gold ETFs usually trade in 1 gram quantities, therefore 1 gram of gold costs roughly Rs.2900. This will change during the day depending on gold prices. Once you’ve purchased an ETF, it will be credited to your demat account on the T+2 day. When you’re ready to sell your ETFs, you can do so through your trading interface just like any other stock. If it’s an offline order, make sure the DIS is deposited in a timely manner. Otherwise, the complete debit to your demat account is done in real time. Your sale revenues will be credited to your selected bank account on T+2 day.
Based on their underlying assets, ETFs have two sets of consequences. Let’s take a look at each one separately.
Index ETFs and sectoral ETFs are handled the same way as equity funds for tax reasons. If held for less than a year, any gains will be categorized as short-term capital gains and taxed at 15%. If these ETFs are kept for more than a year, they become long-term capital gains, which are tax-free in the investor’s hands.
Gold ETFs and overseas ETFs are classified as non-equity products for tax reasons. If you hold it for less than three years, it will be considered short-term gains and will be taxed at your highest rate. Long-term capital gains are those that have been kept for more than three years and are taxed at 10% of gains or 20% of indexed gains, whichever is lower.
Only gold ETFs exploded in popularity in India amid the steep rise in gold prices from 2009 to 2012. For passive investment, investors still prefer index funds to index ETFs. Clearly, the product will need to grow and become more liquid before ordinary investors will be interested in ETFs.
Is it possible to purchase ETFs with Zerodha?
ETFs on Zerodha: Zerodha offers every customer a fantastic opportunity to purchase and sell ETFs using our trading platform, lowering costs and improving profits. This means that once an ETF is purchased, it is transferred on a T + 2 basis to the customer’s demat account.
How can I purchase an index on Zerodha?
To add NIFTY options to the market watch, key in, then a space, then CE or PE. At that strike price, you’ll get a drop-down menu of weekly and monthly possibilities. You can pick and choose the ones you want. The similar procedure can be used to add Banknifty choices.
Is it possible to lose money on an ETF?
While there are many wonderful new ETFs on the market, anything promising a free lunch should be avoided. Examine the marketing materials carefully, make an effort to thoroughly comprehend the underlying index’s strategy, and be skeptical of any backtested returns.
The amount of money invested in an ETF should be inversely proportionate to the amount of press it receives, according to the rule of thumb. That new ETF for Social Media, 3-D Printing, and Machine Learning? It isn’t appropriate for the majority of your portfolio.
8) Risk of Overcrowding in the Market
The “hot new thing risk” is linked to the “packed trade risk.” Frequently, ETFs will uncover hidden gems in the financial markets, such as investments that provide significant value to investors. A good example is bank loans. Most investors had never heard of bank loans until a few years ago; today, bank-loan ETFs are worth more than $10 billion.
That’s fantastic… but keep in mind that as money pours in, an asset’s appeal may dwindle. Furthermore, some of these new asset classes have liquidity restrictions. Valuations may be affected if money rushes out.
That’s not to say that bank loans, emerging market debt, low-volatility techniques, or anything else should be avoided. Just keep in mind while you’re buying: if this asset wasn’t fundamental to your portfolio a year ago, it should still be on the periphery today.
9) The Risk of Trading ETFs
You can’t always buy an ETF with no transaction expenses, unlike mutual funds. An ETF, like any other stock, has a spread that can range from a penny to hundreds of dollars. Spreads can also change over time, being narrow one day and broad the next. Worse, an ETF’s liquidity can be superficial: the ETF may trade one penny wide for the first 100 shares, but you may have to pay a quarter spread to sell 10,000 shares rapidly.
Trading fees can drastically deplete your profits. Before you buy an ETF, learn about its liquidity and always trade with limit orders.
10) The Risk of a Broken ETF
ETFs, for the most part, do exactly what they’re designed to do: they happily track their indexes and trade close to their net asset value. However, if something in the ETF fails, prices can spiral out of control.
It’s not always the ETF’s fault. The Egyptian Stock Exchange was shut down for several weeks during the Arab Spring. The only diversified, publicly traded option to guess on where the Egyptian market would open after things calmed down was through the Market Vectors Egypt ETF (EGPT | F-57). Western investors were very positive during the closure, bidding the ETF up considerably from where the market was prior to the revolution. When Egypt reopened, however, the market was essentially flat, and the ETF’s value plunged. Investors were burned, but it wasn’t the ETF’s responsibility.
We’ve seen this happen with ETNs and commodity ETFs when the product has stopped issuing new shares for various reasons. These funds can trade at huge premiums, and if you acquire one at a significant premium, you should expect to lose money when you sell it.
ETFs, on the whole, do what they say they’re going to do, and they do it well. However, to claim that there are no dangers is to deny reality. Make sure you finish your homework.
Are ETFs suitable for novice investors?
Because of their many advantages, such as low expense ratios, ample liquidity, a wide range of investment options, diversification, and a low investment threshold, exchange traded funds (ETFs) are perfect for new investors. ETFs are also ideal vehicles for a variety of trading and investment strategies employed by beginner traders and investors because of these characteristics. The seven finest ETF trading methods for novices, in no particular order, are listed below.
In India, do ETFs pay dividends?
The majority of ETFs reinvest the dividends received from the underlying equities. There are relatively few ETFs in India that have a history of paying dividends, and those that do have mechanics that are very similar to how a dividend is dispersed in a stock. They usually announce a record date, and investors who were invested in the ETF on that date are eligible to receive the dividends.