When it comes to index funds, it would be a lot easier because they are standard mutual funds that allow for SIPs and fractional unit purchases.
It’s important to remember that while an index may have a corresponding ETF, an index fund does not. In addition, index funds have a little higher expense ratio than ETFs. Having SIPs in index funds is, nonetheless, a smart idea. HDFC offers index funds for both the Sensex and the Nifty. One is offered from ICICI Prudential for the Nifty Next 50, among other things.
Direct plans are a type of mutual fund scheme that comes at a lesser cost (expense ratio). Direct plans were initially introduced with the goal of saving money for investors who bought directly without going through an intermediary. Several platforms have emerged in the last seven to eight years to make investing in direct funds easier.
Regular plans, on the other hand, are supplied by distributors who also provide fund suitability advice.
If you’re new to mutual funds, it’s critical that you seek expert advice on how to develop your portfolio. You can either buy it through a regular plan through a reputable distributor or through a registered investment adviser who will assist you in purchasing it through a platform that offers direct funds. Make sure you’re getting solid advice.
In ETF, how do you set up SIP?
You can arrange your investments with SIP (Systematic Investment Plan) orders. The SIP option is only available for cash market delivery trades. You must go to Orders > SIP > Create a SIP to create a SIP. You have the option of linking an existing order basket or creating a new one.
You can choose your desired planned day and time after you’ve linked the basket, as illustrated below:
Schedules
You can create up to five 30-minute programs for every day of the month between 9:30 a.m. and 3 p.m. There is a limit of one SIP per day and per time slot. Your SIP order will be issued to the exchange on the next trading day if your scheduled date falls on a holiday. You can also use the options below to pause, edit, or delete your SIPs:
Is ETF and SIP the same thing?
Investing in an ETF on a monthly basis is a little off the beaten path, but it’s a good idea.
In India, systematic investment plans (SIPs) are a popular instrument for retail investors. ETFs, on the other hand, are one of the retail investor-friendly products that does not offer a traditional SIP method.
An ETF is traded in the same way as a stock is – through a demat account and in units.
SIP investing, on the other hand, allows us to invest on a regular basis without having to worry about market timing (which we need not). By withdrawing money at regular intervals, it ensures that we don’t spend it all and, like an automatic savings tool, contributes automatically to our wealth.
We can also duplicate a SIP’s key features frequent investments with an ETF if we want to.
Auto-investing in shares is available through the brokerage arms of several institutions. Bank brokerages such as SBI, Kotak, and ICICI allow us to choose a predetermined sum or a fixed number of units of a specific ETF (or share) at fixed intervals for a specified period of time.
We can always arrange for a monthly reminder to invest in an ETF, i.e. place a trade, with other brokers.
ETFs still have costs to consider
In most circumstances, once you pay the trade charge, you can keep the stock or bond without paying any more costs.
Depending on whatever ETF you invest in and which brokerage firm you use, you may have to pay similar costs when buying or selling ETFs.
That management, no matter how insignificant, costs money. Expense ratios are paid on most ETFs to compensate these costs.
Not all investments are available
ETFs normally provide a good selection of assets, but you won’t be able to invest in everything with an ETF.
While industrialized markets may have a big range of bond ETFs, stock ETFs, and just about every other sort of ETF you can think of, emerging markets may not.
You may also want to make other types of investments that aren’t appropriate for ETFs.
If you want to acquire a specific rare vintage car or work of art, an ETF won’t be able to help you.
Harder to pick investments or investment mixes
Some people want to be very hands-on when it comes to their investing. Others will not invest in certain firms or asset classes because of their sustainability or values.
Some people, for example, will not invest in companies that offer meat or cigarettes.
It may be tough to find ETFs that invest in accordance with your very precise investing objectives. Stocks of companies you don’t wish to own may be included in ETFs.
You can find up owning certain investments in many ETFs due to their broad reach.
This may give you the impression that your asset allocation is different than it is. It may also put you at risk of being overly invested in specific companies or investments.
As a result, knowing what you’re investing in within each ETF is critical. Then you may assess your investments as a whole to ensure you’re getting the right amount of exposure.
Partial shares may not be available
You may not be able to acquire partial shares of ETFs depending on your brokerage business. While this isn’t a major issue, it can make investing more difficult.
If you wish to invest $500 per pay period with a brokerage that doesn’t accept partial ETF investments, you’ll need to figure out how many entire shares you can buy with the money you have.
Any money left over would have to be put aside until your next paycheck, when you’d have to figure out how many shares you could buy at the pricing of the next payment.
Because mutual funds allow you to purchase fractional shares, you might easily deposit $500 each week.
If partial shares are crucial to you while investing in ETFs, check to see if partial shares are offered with the brokerage firms you’re considering before opening an account.
How does SIP function in an ETF?
ETFs, or Exchange Traded Funds, are investment vehicles that imitate the performance of indices such as the Nifty 50 or the Sensex by holding stocks and bonds in the same proportion as the underlying index. They follow the passive investment principle, in which the fund manager only makes changes to the fund composition when the underlying index changes.
ETFs can help an investor obtain returns that closely match a specific index in this way. However, because ETFs are market-linked products, their returns aren’t guaranteed, and there’s a chance that the fund’s returns would differ slightly from index returns.
You can invest in ETFs either as a flat sum or as a series of payments. Choosing a SIP approach, on the other hand, is more convenient and provides various advantages. SIPs are also a wonderful method to keep on track with your long-term goals by allowing you to invest at regular intervals.
There are three ways in which the commitment feature operates. To begin with, SIP breaks down the bulk of your investment into smaller amounts that don’t appear to be a financial strain. Second, you develop the habit of saving aside a portion of your monthly salary, which is then invested in the ETF. Finally, SIP automates the entire investment process, eliminating the need for manual intervention, and eliminating the risk of forgetting to invest in your goals.
SIP in ETFs improves the efficiency of the investment process from the standpoint of wealth accumulation. When you invest for the long term with a SIP, you will benefit from compounding, which means you will receive interest not just on your initial investment but also on any interest, dividends, and capital gains that build.
You can benefit from rupee cost averaging with a SIP. During market downturns, your regularly invested SIPs are used to purchase a larger number of ETF units at reduced prices. When markets rise, on the other hand, your SIPs will acquire a smaller amount of units. This lowers the cost of your investment. SIP, when combined with the low-cost structure of ETFs, may help you earn larger returns.
ETFs, on the whole, provide investors with the benefits of passive management, diversification, and liquidity because they actively trade on the exchange like stocks during market hours, and you can buy/sell ETF units during market hours to satisfy your financial needs.
Here’s an example of the returns you’d get if you invested in ETFs using the SIP method.
An SIP of Rs 5000 invested in Nippon India ETF Gold BeES for a period of 10 years (total investment of Rs 6,05,000) will result in a corpus of Rs 10,16,637, as shown in the graph above.
Similarly, a Rs 5000 SIP invested in Nippon India ETF Nifty BeES for 10 years (total investment of Rs 6,05,000) would let you accumulate a Rs 10,39,104 corpus.
If you had deposited the same amount of SIPs in a large-cap fund, such as Nippon India Large Cap Fund, for the same 10-year period, you would have ended up with a corpus of Rs 9,81,432, a difference of Rs 57,672.
Is an ETF preferable to a mutual fund?
ETFs are frequently more tax-efficient than mutual funds due to the way they’re handled. Mutual funds, on the other hand, are organized in a way that makes capital gains taxes more likely. The assets in a mutual fund are frequently acquired and sold because they are actively managed.
Is it possible to start a SIP on Zerodha?
The status of the SIP will change from ‘Active’ to ‘Paused’ once you’ve done that. You can restart it by pressing the ‘Play’ button, which will change the status from ‘Paused’ to ‘Active.’ The SIP orders will be triggered at the exchange at 8 a.m.
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 types 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.
Is an ETF a solid long-term investment?
Investing in the stock market, despite the fact that it is renowned to provide the largest profits, may be a daunting task, especially for those who are just getting started. Experts recommend that rather than getting caught in the complexities of the financial markets, passive instruments such as ETFs can provide high returns. ETFs also offer benefits such as diversification, expert management, and liquidity at a lower cost than alternative investing options. As a result, they are one of the best-recommended investment vehicles for new/young investors.
According to experts, India’s ETF market is still in its early stages. Most ETFs had a tumultuous year in 2020, but as compared to equity or currency-based ETFs, Gold ETFs did better in 2020, according to YTD data.
Nonetheless, experts warn that any type of investment has certain risk. For example, if the stock market as a whole declines, an investor’s index ETFs are likely to suffer the same fate. Experts argue index ETFs are far less dangerous than holding individual stocks because ETFs provide efficient diversification.
Experts suggest ETFs are a wonderful investment option for long-term buy-and-hold investing if you’re unsure about them. It is because it has a lower expense ratio than actively managed mutual funds, which produce higher long-term returns.
ETFs have lower administrative costs, often as little as 0.2% per year, compared to over 1% for actively managed funds.
If an investor wants a portfolio that mirrors the performance of a market index, he or she can invest in ETFs. Experts believe that, like stock investments, which normally outperform inflation over time, ETFs could provide long-term inflation-beating returns for buy-and-hold investors.
Is an exchange-traded fund (ETF) tax-free?
ETFs are a considerably newer sector in India than mutual funds. These ETFs have only been around for a few years, but they have failed to gain traction in India. ETFs are usually developed based on specific benchmarks or assets. You can have an ETF on Gold, an ETF on Silver, or an ETF on any of the indices like the Nifty or the Bank Nifty, for example. What is a Gold ETF and how does it work? The ETF holds an identical amount of gold with the custodian bank and issues gold ETFs in exchange for it. As a result, because your gold ETFs are backed by physical gold held by a custodian bank, they are completely safe. In the same way, index ETFs hold component equities in the same proportion as the index. The Fund of Funds (FOF) module, on the other hand, is a module that creates a portfolio of funds by combining and matching funds to meet your individual needs.
ETFs are distinguished from traditional mutual funds in one significant way: they are listed and traded on a stock exchange. So, just like any other stock, Gold ETFs can be bought and sold on the NSE by paying brokerage and STT. They are credited to your demat account in the same way that any other stock is. There are market makers who make the market for ETFs by providing buy and sell quotes before the real trading begins. Global funds have been the majority of FOFs in India. The FOF route has been employed by Indian mutual funds with global affiliations to establish a portfolio of global funds of their foreign stakeholder, allowing Indian investors to get indirect access to global markets. However, because global markets aren’t exactly producing a lot of alpha, the focus on FOFs has been limited.
ETFs account for less than 1% of Indian mutual funds’ total assets under management (AUM). This is due to three major factors. To begin with, Indians are well-versed in separate loan and equity products. They are apprehensive about a product like an ETF, which is more difficult to comprehend than a pure FD or pure equities vehicle. One of the reasons why ETFs haven’t taken off as expected is a lack of awareness. Second, India is an alpha market. The idea of investing in stock for the sake of obtaining benchmark returns is unappealing to most investors. SIPs in diversified stock funds, they believe, are a superior option. The performance of an active fund is greater since the fund manager can utilize his discretion in stock selection. The Nifty, on the other hand, has remained almost unchanged between March 2015 and March 2017. Diversified equities funds obviously beat an index ETF throughout this time period, while an index ETF would have provided zero returns. Finally, unlike the US and European markets, ETFs are not extremely cost effective. There isn’t much of a cost benefit in ETFs when you sum up the fund management costs and then add in the market brokerage, STT, and related expenses.
Another key reason why ETFs haven’t taken off in India is the tax situation. The tax treatment of ordinary equities and equity mutual funds is same. If they are held for less than a year, they are considered as short term capital gains, and if they are held for more than a year, they are classified as long term capital gains. Long-term capital gains are tax-free in both circumstances, but short-term capital gains are taxed at a reduced rate of 15%. ETFs are at a disadvantage in this regard. To begin, an ETF profit will only qualify as long-term capital gains if it is held for more than three years. In the case of ETFs, anything less than three years is classed as short term capital gains. Second, there is an unfavorable tax rate. Short-term capital gains from ETFs in India are taxed at the investor’s highest marginal tax rate, while long-term capital gains are taxed at either 10% without indexation or 20% with indexation benefits. As a result, ETFs in India score lower in terms of both returns and tax efficiency. Certainly a compelling argument against ETFs!
The concept of a Fund of Funds (FOF) is widely popular in the West and even in Asian nations. When it comes to mutual fund investing, most institutions adopt the FOF method. These FOFs have failed to impress in terms of performance. Anyway, when the entire globe is looking to India for alpha, a FOF focused on global markets isn’t exactly adding value. Second, FOFs are subject to unfavorable taxation. For tax reasons, a FOF that aggregates equity funds is classified as a debt fund. One of the main reasons why FOFs haven’t taken off in India is because of this.
ETFs and FOFs have not yet taken off in India in a large way. Aside from the cost and return considerations, the tax implications play a significant role in why investors choose traditional equity funds versus ETFs.