Exchange Traded Funds (ETF’s)
Exchange Traded Funds Overview
ETF’s are known as exchange traded funds. ETFs are a collection of underlying securities bundled into one product that can be bought and sold in the exchange. They are managed by mutual fund schemes or index funds and generally offer investors a way to buy into a group of securities instead of just one. We can say the ETF’s are same as stocks on any exchange and trades any index or a commodity or a basket of assets.
An ETF’s price is determined by its Net Asset Value (NAV) and the demand supply in any exchange. You can learn more about how NAV is calculated here. The trading price of an ETF is generally close to it’s NAV.
Like any stock the prices of ETF’s are continuously moving on real time which can be bought or sold anytime during the trading hours of the day. Thus unlike typical Mutual fund units Entry and are very easy. Buying of a single unit of an ETF will give one exposure over the entire holdings of the assets covered in the ETF since the NAV or its price movement is in tandem with the price movements of all its holding assets.
Pro’s and Con’s of ETF’s
- Hassle free trading possible via stock exchanges in which it is listed.
- Can be held in electronic form in a Dematerialised format and no physical holdings required (As in case of commodities / Physical share certificates).
- NO tension of any theft as it is hold in electronic form as compared to physical holding of precious metals bought for investment. Gold being a good hedge for Inflation.
- Can trade in as low as a single unit unlike min investment amounts in mutual funds, thus Suits all types of investors (small / big)
- Continuous / Real-time price updates over Stock exchanges
- Gives a good diversification of a portfolio even in small investment amounts.
- Costs are much lower as compared mutual funds or owning physical assets like commodities, shares etc…
- SIP of ETF investment can create a good value of a portfolio over a longer term investment horizon.
- No STT applicable.
- No Wealth Tax.
- Covered under the purview of Long Term Capital gains on Income tax Act (i.e. no tax applicable if sold after a period of 1Yr)
- Lack of Liquidity as not very well known instrument. Due to this Bid – Ask price gap may be high.
- Due to the diversified portfolio, a positive movement in one asset may be nullified by a negative movement of another. This results on a very minimal affect on the overall NAV and one cannot enjoy benefits from a positive moving asset.
- One cannot modify the portfolio holdings as it is managed by a Fund Manager who does all the required operations.
- Dividend paid by some dividend yield ETF’s (not all) may not be as high as good individual dividend yield stocks.
- May be limited to some large market Cap. Shares companies and thus some small cap or mid cap companies better performance (in terms of price multiplication) opportunity may be missed out.
Types of Exchange Traded Funds (ETF):
- Equity Index ETF’s
E.g.: NIFTYBEES, BANKBEES, KOTAKNIFTY etc…
- Gold ETF’s
E.g.: GOLDBEES, GOLDSHARE, RELGOLD etc…
- Liquid ETF’s
E.g.: LIQUIDBEES, which has daily dividend reinvestment and price is maintained around 1000.
- World Indices ETF’s
E.g.: N100, HNGSNGBEES
Some of the popularly known ETF listed in NSE / BSE.
NSE Listed ETF’s
- Overall Information: http://www.nseindia.com/products/content/equities/etfs/etf.htm
- Live Market: http://www.nseindia.com/live_market/dynaContent/live_watch/equities_stock_watch.htm?cat=E
- Brochure: http://www.nseindia.com/content/press/prs_ETF_brochure.pdf
BSE Listed ETF’s