Exchange Traded Funds (ETFs) - Advantages & Types of ETFs in India

What are Exchange Traded Funds (ETFs)?

Exchange traded funds pool the financial resources of a few people and use it to purchase different tradable monetary assets, for example, shares, debt securities, for example, bonds and derivatives. Majority of Exchange Traded Funds (ETFs) are registered and regulated by the Securities and Exchange Board of India (SEBI). It is an engaging option for investors with restricted expertise of the stock market.

How Exchange Traded Funds (ETFs) Work?

ETFs share trademark highlights of the two shares and mutual funds. They are by and large traded in the stock market as shares delivered through creation blocks. ETF funds are recorded on all significant stock exchanges and can be purchased and sold according to requirement during the equity trading time.

Changes in the share price of an ETF rely upon the costs of the underlying assets present in the pool of resources. On the off chance that the price of at least one asset rises, the share price of the ETF rises proportionately, and the other way around.

The estimation of the dividend got by the share-holders of ETFs relies on the performance and asset management of the concerned ETF company.

They can be actively or passively managed, according to company norms. Actively managed ETFs are worked by a portfolio manager, after cautiously assessing the stock market conditions and undertaking a calculated risk by investing in the organizations with high potential. Passively managed ETFs, then again, follow the trends of specific market indices, just investing in those organizations recorded on the rising charts.

There are a few focal points of investing in an ETF as opposed to opting for mutual funds or shares of a company.

Real Time Pricing

Real time pricing is the thing that makes ETF unique in relation to mutual funds. ETFs are actually similar to mutual funds, yet its market price stays unstable simply like stocks. Indeed, ETFs price can fluctuate all through the trading session, similar to stocks.

Passive Investing

Building right strategy in mind for investing is quite critical. What is the correct frame of mind? Rehearsing passive investing. What is passive investing? No active involvement. Simply purchase an investment, and forget about it.

ETF in India is one genuine illustration of passive investing. Below are the attributes of ETFs which makes it appropriate for passive investing:

No Active Management

The best piece of ETF is, there is no active fund manager who is taking choices on which stocks to purchase and sell. How this is a best part? Since here the chief is one who is here and there savvier than the traditional 'fund managers'. Who is the chief? The chief is Mr. Market.

Safer than Stocks

Chances of a misfortune when one is investing in a solitary stocks is high. Be that as it may, as portfolio of ETF comprises of a few stocks, henceforth it gives the upside of diversification. Subsequently ETF are safer than direct stocks.

Purchase Best Stocks at low cost

Suppose you need to purchase best blue chip stocks. Do you realize what is the most ideal approach to do it? Purchase a Nifty or Sensex based index fund or an ETF. Another model, in the event that you need to purchase stocks of best banks, purchase a Bank ETF.

Long Term Holding

There is risk included when an individual is holding stocks for long term. Why? Since the business fundamentals of individual stocks may go down with time. In any case, business fundamentals of an index (say Bank Nifty), will stay unblemished consistently. How? Since index fundamentally incorporates simply the best stocks.

Low Cost

As there is no active fund management included, ETFs are most cost viable for investors (even contrasted with index funds).

(Also Read: Best Mutual funds to invest in 2021)

Various Types of ETFs in India

Out of the types of ETFs which work in India, it tends to be characterized into the following  general categories (and sub-categories):

Equity

• Index

• Bank

• Midcap

• Infrastructure

• Dividend Based

• World Indices (like NASDAQ 100 and HangSeng)

Debt

• Money Market

• Gold

There are near 65+ number ETF in India. The complete asset size (AUM) of every one of these ETFs is near Rs.69,000 Crores. Contrast this and Mutual Funds, and you will know why I state that ETF in India has not developed so a lot. AUM of all equity based mutual funds in India is  Rs. 12 lakhs Crore (approx).

How to Select a Good ETF in India?

So now we realize that what are ETFs and its preferences over traditional stocks and mutual funds. In any case, how to pick a decent ETF? Which are the parameters one should glance in a mutual fund prior to purchasing its shares?

Favored Benchmark

There are chiefly 4 bases of ETFs accessible in India: Equity, Debt, Gold and world indices based. Inside equity based ETFs we have ETFs which track fundamental indices, banks, mid cap stocks, infrastructure stocks and so forth So before one purchases an ETF, he/she should choose the favored subject. We will find out about sorts of ETFs below.

High Trading Volume

Investors should take care to purchase an ETF whose trading volume is high. Why? Since for traders, low trading volume will bring about higher offer ask spread, prompting more cost of investment. Model: trading volume of 'ICICI Pru Nifty ETF' as on 7-May'19 was Rs.164 Lakhs. Essentially, trading volume of 'MOST Shares M50 ETF' as on 7-May'19 was simply Rs.1.45 Lakhs. So what do you figure, which ETF will be better? ICICI Pru will be better.

Low Tracking Error

Suppose there is an ETF which follows Nifty-50 index. In most recent 1 year, Nifty has increased in value by 11.11%. In a similar period, the ETF has increased in value by just 10.99%. The distinction between returns created by ETF and Nifty's gratefulness is called tracking error. Financial specialist should pick the ETF with least tracking error.

Low Expense Ratio

As ETFs track an index, consequently they are not actively managed. This significantly cuts down their expense ratio. An ordinary Nifty 50 ETF will have an expense ratio as low as 0.55%. Be that as it may, ICICI Pru Nifty ETF has announced its expense ratio as 0.05% as on 31-mar'19.

Index Funds vs ETFs vs Stocks

Why a speculator should think to think about the difference between index funds, ETF and stocks? Since it will assist one with picking the best other option.

So which is the best option between these three options? Allow me to clarify it in following four heads:

Beginner yet energetic about stocks

This is that speculator who is so enthusiastic about trading stocks that, for him/her nothing else works. Yet, the individual comes up short on the expertise of stock analysis. This sort of speculator can go with Index ETFs.

Keen on equity (yet can do just passively)

Who are these investors? These are individuals who are busy. They can't actively deal with their investment portfolio. They neither have the opportunity to learn stock analysis. However, they might want to exploit equity investing (in terms of high returns). This kind of speculator can go with index funds.

Realizes Stock Analysis

Who are these individuals? These are individuals who have sorted out some way to examine stocks. Henceforth they have a talent to pick stocks. Such kind of investors should go with direct stock investing. Individuals who realize how to deal with stocks, can create a lot higher returns than ETFs and Index Funds.

Cost Sensitive Investor

Index funds are the most cost compelling investment option among ETFs and stocks. In long term, lower cost of index funds can guarantee higher returns than ETF. Both ETF and Index Funds track an index. Subsequently they can yield just arrived at the midpoint of returns. In any case, as index funds has a lower cost, it will produce preferable returns over ETF in long term.

(Also Read: Mortgage Backed Securities)