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. The trading of ETF units happens during market hours, exactly like stock shares. 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:
What Nifty ETF has the most trading volume?
During the market fall on Monday, Nifty Bees, an exchange traded fund (ETF) that mirrors the broad-based Nifty 50 index, experienced the largest activity in its 20-year history at 205 crore on the National Stock Exchange (NSE).
In Zerodha, how can I acquire the Nifty 50 index?
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.
Do ETFs pay out dividends?
Dividends on exchange-traded funds (ETFs). Qualified and non-qualified dividends are the two types of dividends paid to ETF participants. If you own shares of an exchange-traded fund (ETF), you may get dividends as a payout. Depending on the ETF, these may be paid monthly or at a different interval.
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.
ETF vs mutual fund: which is better?
- Rather than passively monitoring an index, most mutual funds are actively managed. This can increase the value of a fund.
- Regardless of account size, several online brokers now provide commission-free ETFs. Mutual funds may have a minimum investment requirement.
- ETFs are more tax-efficient and liquid than mutual funds when following a conventional index. This can be beneficial to investors who want to accumulate wealth over time.
- Buying mutual funds directly from a fund family is often less expensive than buying them through a broker.
Can I sell ETF whenever I want?
ETFs are popular among financial advisors, but they are not suitable for all situations.
ETFs, like mutual funds, aggregate investor assets and acquire stocks or bonds based on a fundamental strategy defined at the time the ETF is established. ETFs, on the other hand, trade like stocks and can be bought or sold at any moment during the trading day. Mutual funds are bought and sold at the end of the day at the price, or net asset value (NAV), determined by the closing prices of the fund’s stocks and bonds.
ETFs can be sold short since they trade like stocks, allowing investors to benefit if the price of the ETF falls rather than rises. Many ETFs also contain linked options contracts, which allow investors to control a large number of shares for a lower cost than if they held them outright. Mutual funds do not allow short selling or option trading.
Because of this distinction, ETFs are preferable for day traders who wager on short-term price fluctuations in entire market sectors. These characteristics are unimportant to long-term investors.
The majority of ETFs, like index mutual funds, are index-style investments. That is, the ETF merely buys and holds stocks or bonds in a market index such as the S&P 500 stock index or the Dow Jones Industrial Average. As a result, investors know exactly which securities their fund owns, and they get returns that are comparable to the underlying index. If the S&P 500 rises 10%, your SPDR S&P 500 Index ETF (SPY) will rise 10%, less a modest fee. Many investors like index funds because they are not reliant on the skills of a fund manager who may lose his or her touch, retire, or quit at any time.
While the vast majority of ETFs are index investments, mutual funds, both indexed and actively managed, employ analysts and managers to look for stocks or bonds that will yield alpha—returns that are higher than the market average.
So investors must decide between two options: actively managed funds or indexed funds. Are ETFs better than mutual funds if they prefer indexed ones?
Many studies have demonstrated that most active managers fail to outperform their comparable index funds and ETFs over time, owing to the difficulty of selecting market-beating stocks. In order to pay for all of the work, managed funds must charge higher fees, or “expense ratios.” Annual charges on many managed funds range from 1.3 percent to 1.5 percent of the fund’s assets. The Vanguard 500 Index Fund (VFINX), on the other hand, costs only 0.17 percent. The SPDR S&P 500 Index ETF, on the other hand, has a yield of just 0.09 percent.
“Taking costs and taxes into account, active management does not beat indexed products over the long term,” said Russell D. Francis, an advisor with Portland Fixed Income Specialists in Beaverton, Ore.
Only if the returns (after costs) outperform comparable index products is active management worth paying for. And the investor must believe the active management won due to competence rather than luck.
“Looking at the track record of the managers is an easy method to address this question,” said Matthew Reiner, a financial advisor at Capital Investment Advisors of Atlanta. “Have they been able to consistently exceed the index? Not only for a year, but for three, five, or ten?”
When looking at that track record, make sure the long-term average isn’t distorted by just one or two exceptional years, as surges are frequently attributable to pure chance, said Stephen Craffen, a partner at Stonegate Wealth Management in Fair Lawn, NJ.
In fringe markets, where there is little trade and a scarcity of experts and investors, some financial advisors feel that active management can outperform indexing.
“I believe that active management may be useful in some sections of the market,” Reiner added, citing international bonds as an example. For high-yield bonds, overseas stocks, and small-company stocks, others prefer active management.
Active management can be especially beneficial with bond funds, according to Christopher J. Cordaro, an advisor at RegentAtlantic in Morristown, N.J.
“Active bond managers can avoid overheated sectors of the bond market,” he said. “They can lessen interest rate risk by shortening maturities.” This is the risk that older bonds with low yields will lose value if newer bonds offer higher returns, which is a common concern nowadays.
Because so much is known about stocks and bonds that are heavily scrutinized, such as those in the S&P 500 or Dow, active managers have a considerably harder time finding bargains.
Because the foundation of a small investor’s portfolio is often invested in frequently traded, well-known securities, many experts recommend index investments as the core.
Because indexed products are buy-and-hold, they don’t sell many of their money-making holdings, they’re especially good in taxable accounts. This keeps annual “capital gains distributions,” which are payments made to investors at the end of the year, to a bare minimum. Actively managed funds can have substantial payments, which generate annual capital gains taxes, because they sell a lot in order to find the “latest, greatest” stock holdings.
ETFs have gone into some extremely narrowly defined markets in recent years, such as very small equities, international stocks, and foreign bonds. While proponents believe that bargains can be found in obscure markets, ETFs in thinly traded markets can suffer from “tracking error,” which occurs when the ETF price does not accurately reflect the value of the assets it owns, according to George Kiraly of LodeStar Advisory Group in Short Hills, N.J.
“Tracking major, liquid indices like the S&P 500 is relatively easy, and tracking error for those ETFs is basically negligible,” he noted.
As a result, if you see significant differences in an ETF’s net asset value and price, you might want to consider a comparable index mutual fund. This information is available on Morningstar’s ETF pages.)
The broker’s commission you pay with every purchase and sale is the major problem in the ETF vs. traditional mutual fund debate. Loads, or upfront sales commissions, are common in actively managed mutual funds, and can range from 3% to 5% of the investment. With a 5% load, the fund would have to make a considerable profit before the investor could break even.
When employed with specific investing techniques, ETFs, on the other hand, can build up costs. Even if the costs were only $8 or $10 each at a deep-discount online brokerage, if you were using a dollar-cost averaging approach to lessen the risk of investing during a huge market swing—say, investing $200 a month—those commissions would mount up. When you withdraw money in retirement, you’ll also have to pay commissions, though you can reduce this by withdrawing more money on fewer times.
“ETFs don’t function well for a dollar-cost averaging scheme because of transaction fees,” Kiraly added.
ETF costs are generally lower. Moreover, whereas index mutual funds pay small yearly distributions and have low taxes, equivalent ETFs pay even smaller payouts.
As a result, if you want to invest a substantial sum of money in one go, an ETF may be the better option. The index mutual fund may be a preferable alternative for monthly investing in small amounts.
Is it possible to do SIP in an ETF?
Yes, ETFs can be purchased under a systematic investment plan (SIP). As a result, your entire SIP amount may not be invested in an one transaction. If an ETF unit costs 2,000 dollars on a SIP date and your SIP amount is 5,000 dollars, only 4,000 dollars (for two units) will be placed in the ETF that month.