As the name suggests, ETFs are funds that are traded on exchanges like NSE, BSE. ETFs like mutual funds invests in stocks , bonds, gold. A very basic question arises is that how are they different from mutual funds? Let's Understand.
One difference between mutual fund and ETF is the ability to buy/sell. For a mutual fund, you might need to wait for (T+2) days to get the allocated mutual fund and (T+3) days to sell the mutual funds where T is the day you execute the order of buy/sell. This does not give you immediate liquidity from your investment and also you are not aware of the exact buying and selling price. Whereas ETFs are like any other stock that is traded on exchange and you know the buy price as well as the sell price. Also, you can buy/sell immediately in seconds. Though this is a advantage of ETF, the climax on why ETFs can disrupt the mutual funds needs you to know the difference between Active & Passive Funds.
Active Vs Passive Funds : Active funds (rabbit) are managed by professionals and a deep research is put to find the best investment (say stocks) and stock portfolios are altered with the current economic changes, corporate changes, etc. All this is done to get the best returns for the investors. Generally the goal is to beat the benchmark. Benchmark is the tracked indexes of stock-market i.e SENSEX, NIFTY (India). Not every fund can beat the benchmark and it is hard to predict beforehand that which mutual funds will be able to do that. Passive funds (tortoise) are like a black box, they simply follow certain rules like tracking the indexes. For example, you choose to invest in ICICI Prudential Sensex ETF. This means you are investing in the Top 30 companies tracked by index SENSEX regardless of what exactly those companies are. Thumb rule is that Mutual Funds are generally active funds and ETFs are passive funds. Passive mutual funds are called Index Funds. Moral is that if you want to beat the market returns then you invest in stocks yourself or choose mutual funds, else you invest in ETFs and be the market. Somebody around you will share the news if crash or bull run happens with Mr. Market.
Advantage of ETFs : Very less expense ratio (0.1%-0.2%). A fund having an expense ratio of 2% will bring your net returns of 12% to 10%, that explains the importance of less expense ratio when gains are huge. Trading benefits i.e Real time buying/selling gives convenience and no exit charges are required for selling. Less volatility as compared to simply buying stocks. This saves hassle of research and continuously following Mr. Market and also saves from a huge probable losses during volatility. Provides opportunity to invest in world indexes such as NASDAQ 100, S&P 500, FTSE 100, NIKKEI 100 etc.
ETFs statistics : From a long-term perspective of 20 years, 57% of large cap funds failed to beat the benchmark in India. Do you still want to invest in Large Cap funds over ETFs? Second is that in US stock market, 4 out of 30 trillion dollars (1 : 7.5) are invested via ETFs whereas in Indian stock market, 1.47 lakh crores out of 170 lakh crores (1 : 115 ) are invested via ETFs. One reason for this is Indian economy is a emerging economy and many mid caps and small caps funds are able to beat the benchmark which is difficult in USA. Though, there is a huge upside potential in Indian market for the ETFs in future. Third is that more than 85% of ETFs investments today are in equity ETFs.
Different types of ETFs in India
Equity ETFs (2001) : Investment is done in broad market indexes, sectoral index ETFs. Following are some ETFs in equity - HDFC Nifty 50 ETF, SBI - ETF Nifty Next 50, Kotak PSU Bank ETF etc.
Bonds ETFs (2019) : Recently launched, BHARAT Bond ETFs lends to Public Sector Companies. Do check out the website for more details about series 1&2 of bharat bond - www.bharatbond.in
Gold ETFs (2007) : Investment is done in 99.5% pure gold. If you want to buy gold only for investment, then Gold ETFs are a better alternative to physically buying gold. Gold ETFs will simply track the gold prices. Generally 1 unit of Gold ETF is equal to price of 1/0.1/0.5g of gold. Following are some ETFs in gold - SBI ETF Gold, Kotak Gold ETF Fund, UTI Gold ETF etc.
Following is the moneycontrol page for all available ETFs - www.moneycontrol.com/mf/etf/
How to buy a ETF? All you need is a trading account with a broker. Following are few top online brokers in India - Zerodha, Paytm Money, Upstox, 5Paisa, HDFC Securities.
In conclusion, if your aim is not to beat the markets and you are happy with consistent benchmark results, then it is a good choice to invest in ETFs. Wisdom is in to keep in mind that 95% people lose money and only 5% make consistent profits in Investing.
Thank You.
Very informative. Well done!
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