Exchange Traded Fund – India

Exchange Traded Fund India

What is Exchange Traded Fund meaning?

Exchange Traded Funds (ETF) are marketable securities, that track a stock index, a commodity, bonds or a basket of assets. It generally operates with an investing mechanism designed to keep it switching close to its net asset value. When you invest in ETFs, your money is invested in a bunch of market securities which are a part of an established index. Just like the name suggests, ETFs are exchange-traded which means that you can buy and sell them at any time of the day when the markets are open.

The supply of ETF shares is regulated through a mechanism called creation and redemption, which involves large specialized investors called Authorized Participants. ETF distributor only buy or sell ETFs from directly from or to authorized participants, i.e. the large broker-dealers with whom they have made an agreement. Authorized participants may wish to invest in the ETF shares for long-term, but they usually act as market makers on the open market.
An authorized participant can regain ETF shares by selling them back to fund’s sponsor. Selling assets to the ETF sponsor, in return for shares in ETF is known as Creation. A redemption mechanism refers to how the market makers of ETF help to coordinate the differences between net asset value and market values.

While most ETFs track stock indexes, there are also ETFs that invest in commodity markets, currencies, bonds, and other asset classes. Many ETFs also have an option available for investors to use income, belief or surrounding strategies.

exchange traded fund meaning

What is the Exchange Traded Fund for India?

India ETFs comprise of securities traded in India. India’s economy is growing but it is not completely stable and can result in irregularity. However, in long-term, India remains to be of interest to market investors.

What are the top 5 India based Exchange Traded Fund?

Top 5 India ETF'sWhat are the top 5 US-based Exchange Traded Fund for India?

Following are the top 5 US-based India ETFs. These five ETFs offer exposure to the emerging market of India. But an investment in these ETFs should be monitored closely because a careful investor can sell shares when returns are no longer attractive.

Top 5 India ETF's for NRI in USA

What are the types of Exchange Traded Funds available for Investment?

1. Gold ETF: If you want to invest in gold without worrying about buying physical gold and storing it safely, then gold ETF is your best option. It tracks the price of gold.every unit represents the price of gold and they are traded on the exchange just like stocks. Few examples of gold ETFs are –

  • SBI Gold ETF
  • Kotak Gold ETF
  • UTI Gold ETF.

2. Index ETF : With an index ETF, investors gain exposure to numerous securities in the single transaction. They track the market index. The index works as a tracking instrument and ETFs track performance of the index by holding shares in its portfolio in the same proportion as the index. Few examples are-

  • SBI ETF BSE 100 (mimics BSE index)
  • Reliance Nippon NIFTY Bees ETF follows the NSE Nitfy fifty index.

3. International ETF: They give investors a general idea of the economic condition of the country. They track the major market index in the country. Few examples of tracking instruments are-

  • NASDAQ ETF by Motilal Oswal which tracks NASDAQ index of USA
  • HANGSENG BEES by Reliance Nippon which tracks HANGSENG stock index of HongKong

4. Sector Specific ETF: Investors who want to invest in a specific sector opt for this ETF. These utilize the performance of the sector as a tracking instrument. Depending on the sector you choose to invest, you will see the value of ETF ranging on the basis of the performance of the chosen sector. Example –

  •   Banking sector – Reliance Nippon Banking Bees ETF
  • ICICI CPSE ETF tracks the performance of 22 CPSE of Government of India.

What is the last one year returns of NIFTY ETF in comparison compared to NSE NIFTY index?

The annualized returns (in %) are shown in the graph given below:

Nifty India etf TRACKING Error 2018

As can be seen, the returns from the SBI Nifty ETF are moving very closely with the Nifty 50 index. This proves the fact that the ETFs seek to mirror the underlying index by using the same ratio of stocks in the portfolio.

Exchange Traded Funds Vs Mutual Funds

Mutual Fund is like an ETF as it is a unit that comprises the value of different companies. A mutual fund is managed by asset management companies and its fund managers. 

ETF and Mutual Funds differ with respect to :

  1. Costs: ETFs have lower costs than traditional mutual funds. Because it does not have to invest cash contributions, an ETF does not have to maintain a cash reserve. Mutual Funds can charge up to 3% while ETFs are always less than 1%.
  2. Taxation: ETFs are structured for tax efficiency and can be more attractive than mutual funds.
  3. Trade: ETF and mutual funds differ with respect to traceability. Mutual Fund selling price will be the price of shares at the end of the day. Whereas, the shares of ETF are traded throughout the day and can be bought and sold at any price. In this respect, ETFs have more liquidity and marketability.

Exchange Traded Fund Liquidity

An attractive feature of ETFs is their ability to be traded throughout the day. The key to a profitable trading experience is Liquidity. It is a function of the creation and redemption process.  ETFs have a wide range of liquidity. The most active funds are very liquid. In such cases, the investor usually gets a reasonable price but that does not mean that less popular funds are not quality investments.

Exchange Traded Fund Gold

What are the features of Gold ETF’s in India?

  • Transparency: Similar to stocks and shares, gold prices on the stock exchange are available publicly.
  • Cost-effective: The commission charges are very low i.e. 0.5% to 1%.
  • Trade: Gold ETFs are easy to trade.
  • Lower Risks: Fluctuations in gold prices are generally not so high. Gold ETFs prevent you from incurring large losses.
  • Tax Benefits : You do not have to pay VAT, Wealth Tax or Securities Transaction Tax on them.

How to use Gold ETF in India?

Gold prices tends to rise when the dollar is weak, so if your investment portfolio holds assets that have exposure to the disadvantage of the dollar, then purchasing gold ETF may help you protect that exposure. Conversely, selling a gold ETF can act as a shield if your portfolio has exposure to the advantage of the dollar.

What are the disadvantages of Gold ETF in India?

In some cases and locations like India, gold ETFs do not have the same tax breaks as exchange-traded funds have. You never actually own a gold bar or coins. Gold ETFs consists of gold contracts and derivatives can only be regained for cash, never gold itself – except in some cases.

What are the advantages of ETFs in India?

1. Cost-effective: They are known to be very cost effective as compared to other funds. This is because there isn’t a lot of management or cost involved in the transactions. They are economical for a small investor and are known to be cheaper over a long period of time.

2. Simple: ETFs focus on simplicity. They are transparent in nature and have a simple structure. ETFs are meant to mimic a particular index, commodity or currency which makes it easier for the investor to understand how his funds are being allocated. It also helps them to make sure that they are investing in a fund that meets their asset allocation requirements.

3. Diversification : By mimicking an index, ETFs provide diversification in the investment. There is no better way to reduce risks than to diversify your funds. ETFs automatically diversify the funds making it easier for us.

4. Management: They do not require active management by the fund manager. They aim at tracking the index without trying to surpass it. ETFs simply need to be invested in the same proportion as the stocks in the index. There are no creative strategies or extra requirements for investment. This keeps costs on the lower side and it also ensures that the chances of risks are reduced..

How do you select the right ETFs in India?

1. The best place, to begin with, is by identifying the benchmark of ETF you are about to buy. You must dig a little deeper and find out what indices the ETFs are tracking.

2. Do the indices match the asset location you have in mind? Check how stocks and bonds are weighted in the ETF. find out whether the weight matches your requirements.

3. Once you have identified the ETFs that match your portfolio requirements, then the next thing to look at is tracking errors. Check the difference between the tracking instrument and the ETF to find out the risk of the ETF.

4. The liquidity determines your probability of investment. Look for ETF that provides adequate liquidity. Two factors that play a role in liquidity of ETF are- liquidity of fund itself and liquidity of shares that are being tracked.

What are the risks involved in ETF in India?

There are a few things that you must be aware of:

  1. The primary risk is that of liquidity. Buying and selling prices of this financial instrument may differ from its NAV or actual economic value.
  2. It requires you to interact with a broker and maintain a Demat account (account made for the purpose of transacting).
  3. If the market goes up, you gain profit. But if it goes down, you suffer loss.
  4. If tracking error is very high, then funds will carry higher risk.

Which are the major banks in India and what ETF they offer?

Schemes Asset Size (in Cr.) % Change Returns (in %) of 1 year
Reliance ETF NV20 18.79 -1.81 12.4
ICICI Prudential NV20 ETF 2.89 12.0
HDFC Sensex ETF 276.98 -0.58 9.5
Kotak Nifty ETF 552.97 -1.68 6.5
SBI ETF BSE 100 1.48 -0.78 3.9

 

Other FAQs about ETF or Exchange Traded Fund in India

Are ETFs only for stocks?

  • No, any asset class that has a published index and has adequate liquidity can be made into an ETF.

Can non-Indian. citizens own ETFs?

  • ETFs are available across many indices in India. In India. anyone who can open a brokerage account and buy stocks can own ETF. So NRI’s or PIO’s can open an appropriate banking and demat acccount to buy ETF’s in India. Another option is to buy ETF’s in USA which use Indian indices as the underlying asset.

How do ETFs derive their liquidity?

  • ETFs derive their liquidity by:
    • Trading of units in the secondary market.
    • Redemption process with the fund.

What happens to dividends declared by the stocks in ETF?

  • Dividends received by the scheme will be reinvested in the scheme. Dividends may also be distributed to the investors.

How much money is in ETFs in USA?

  • From the beginning of 1998 to the end of 2000, assets under management of ETFs grew nearly tenfold. In 2001, the assets had reached $75.8 billion.

Who can buy ETFs?

  • It can be bought by any investor through provided the ETF is registered for sale.

How does one trade ETFs?

  • They can be bought or sold just like stocks through the your stock broker or trading terminals anywhere across the country.

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Comments (3)

  • bijujoseph

    What is your opinion about NIFTY Bees ETF?

    January 20, 2019 at 7:30 pm
    • FinVizer

      NIFTY Bees ETF is a good option, if you want to buy the entire NIFTY basket of stocks or NIFTY index in one shot. The average expense ratio is less than 1% and there is no fund manager bias. Downside is that if NIFTY index goes down, the value of the ETF also decreases.

      January 20, 2019 at 7:34 pm
  • harivish

    what is advantage of gold ETF when Governemnt of India is giving soverign gold bonds with 2.5% interest also? That is a much better than ETF which does not give any interest

    January 30, 2019 at 2:40 pm

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