What is Exchange Traded Fund or ETFs?
An exchange-traded fund is an investment instrument traded on stock exchanges just like equities. An ETF holds assets such as stocks, bonds or commodities such as Gold and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day.
Advantages of this instrument is, ETFs track an index and are attractive investments because of their low costs and stock-like features. An ETF has the valuation feature of a mutual fund which can be purchased or redeemed any time during trading hours unlike mutual funds which can be purchased at the end of each trading day on its net asset value.
ETFs are similar in many ways to traditional mutual funds, except that units or shares in an ETF can be bought and sold throughout the day like stocks on an exchange through a broker. Exchange Traded Funds in India listings include gold, silver, currencies, index etc.
With market at it’s lowest levels, how do you determine which is good stock that gives you best returns? Wouldn’t it be better to simply invest in the our BSE or NSE index?
Let me explain a scenario when you can go for this, when you know the market is attractive and wanted to invest and you don’t have time to analyze stock valuations but wanted to invest in country’s best large cap stocks and you don’t want to get into mutual funds for it’s inconsistent performance, high fund management charges and applicable loads on entry and exit, you go for ETFs.
For ETFs, there’s no entry load, no exit load but there’s some brokerage charge by the broker who is selling you the index. Just like you pay brokerage charge when you buy stocks, you pay for this too but this brokerage charge is relatively higher as you are purchasing the basket of stocks representing index. One goes for ETFs for short term investments or long term systematic investments and wanted to avoid the hassles of a mutual fund.
One more advantage of ETF is, you can buy the index at a particular time of the day when you feel the index is down say because of some bad news and you feel it’s going to recover by closing time. But in a mutual fund, you can buy only the nav determined at end of each trading day.
Basically, you are buying stocks of all the top 30 companies representing index - Sensex. Or stocks of all top 50 companies representing index - Nifty.
For example, the Nifty BeES ETF from Benchmark Mutual Fund invests in the same stocks that comprise S&P CNX Nifty Index. (BeES : Benchmark Exchange Traded Scheme)
Examples of ETFs in India: Bank BeES, Gold BeES, ICICI SENSEX Prudential ETF, Junior BeES, Kotak Gold ETF, Liquid BeES, Nifty BeES, PSU Bank BeES, Reliance Gold ETF, UTI’s SUNDER, UTI Gold ETF
ETFs are not Mutual Funds but have similarity with it. The difference being, mutual fund units cannot be sold on the exchange at any time, however as the name says, ETF units can be bought and sold in the exchange at any time during market trading hours.
Just like you need DMAT account and trading account for trading in equities, you need these accounts to trade in ETFs.
Why should we choose ETFs to other Mutual Funds?
God only knows whether our Fund managers will outperform index. ETFs score over mutual funds as they are returns are market linked, you can buy or sell during market hours and the charges are very less but watch out for Expense ratio among ETFs – Cheaper the best.
If you believe in the golden words that “equities will outperform all other assets classes in the long run”, then simply start investing some amount in the market regularly on every crash say in every month. Once you feel, the market has peaked, just reduce your investments and start booking profits and move this profits to Debt instruments. Once the market corrects, start investing again regularly.