Advantages of Investment in Exchange Traded Funds- (ETFs)
ETFs are essentially index funds that are listed on an exchange and track the price performance of the underlying index closely. The ETF trading value is based on the net asset value (NAV) of the underlying stocks in the target index. E.g., a Nifty ETF will look to replicate CNX Nifty returns.
An ETF holds assets such as
stocks, commodities, or bonds, and trades close to its net
asset value over the course of the trading
day. ETFs are popular world over with with less risk and much scope for returns on investment.
The Exchange Traded Funds advantages:
ETFs can be Traded like Stocks
You can buy and sell an ETF during market hours on a real time basis as well as put advance orders on purchase such as limits or stops. In case of conventional mutual funds, purchase or sale can be done only once a day after the fund NAV is calculated.
ETFs have Diversification Benefit
In case of Nifty ETF, you own the complete basket of 50 stocks and remain diversified.
ETFs have Low Cost of Investment
The passive investment style with low turnover helps keep costs low. ETFs are known to have among the lowest expense ratios compared to others schemes.
ETFs are Simple and Transparent
The underlying securities are known and quantities are pre-defined (In case of conventional mutual fund schemes, one needs to wait for the monthly factsheet). No form filling is required if you transact in the secondary market. Investment can be made directly from the fund house or the exchange.
ETFs Supports Small Ticket Investments
ETFs are a great tool for investors wanting to start with a small corpus. The minimum ticket size is 1 unit (in case of IIFL Nifty ETF, 1 unit is approximately 1/10th of Nifty level, i.e Rs500, when Nifty is at 5000). Premium and discount also tends to be higher in the futures segment, than in ETFs.
ETFs are Taxed like Stocks
Investors can take advantage of special rates for short term and long-term capital gains.
Who can Invest in ETFs
- Long term investors
- First time investors
- Investors looking for a low cost diversified portfolio
- Traders who do not have enough capital to invest in index futures
- Institutional investors looking to temporarily park cash during portfolio transition
- Arbitrageurs to carry out operations with low impact cost
Points to remember before Investing in ETFs
Invest in ETFs with ample secondary market liquidity
Fund houses do depend on market makers and arbitrageurs to maintain liquidity to keep the price in line with the actual NAV.
ETFs track the target index
Any investor wanting an exposure to a particular target index like Nifty will do well by investing in ETFs. The objective of ETF is to be the index rather than beat the Index.
Always invest in key benchmarks ETFs rather than sectoral funds
Investing in sectoral ETFs is prone to higher volatility compared to key benchmark ETFs like Nifty.
Cost of trading on the exchange
Investor will have to bear the cost of brokerage and other applicable statutory levies e.g, Securities Transaction Tax, etc, when the units are bought or sold on the stock exchange.
Invest in ETFs and reap the benefits without worrying about the hassles of individual stocks..
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