Skip to main content

Portfolio: Exchange Traded Funds (ETFs)

THE EVENTS of the last few days have caused almost everyone to reflect on the security provisions that are available in the country. In retrospect, the sheer lack of preparedness to cope with acts of terror like that experienced in Mumbai hits you in the face. The realisation, however, has only come after the dastardly event took place.

Retrospection on your portfolio may not be the first thing on your mind currently but in a sense, investors need to be reminded that preparations need to provide a certain degree of stability to your portfolio. And diversification is clearly the mantra that financial experts recommend. One step towards achieving this diversification could be by investing in Exchange Traded Funds (ETF).

WHAT ARE ETFs?

Technically speaking, ETFs are collective investment funds, which have underlying assets such as gold, stocks etcetera. However, what is significantly different about ETFs is that they are traded on the stock exchange in the same way that a share is traded. The funds are generally divided into units and an individual can purchase these through the broker and trade them on the exchange. Explaining the part played by an ETF in an investor’s portfolio, An ETF gives you low-cost access to asset classes which are not easily available with the added benefit of not having to possess it physically.

WHAT ARE THE DIFFERENT TYPES?

If you were looking at investing in ETFs, then there are only three kinds that are available in India - equity ETFs, gold ETFs and liquid ETFs. An equity ETF is one that tracks the performance of a particular index on the Stock Exchange. It invests either in securities on the index or a sample of the securities in the index. Indexes tracked include the Nifty Index, the Nifty Junior Index, Bank Nifty Index, PSU Bank Index and the Sensex. Commodity ETFs are another type of ETFs, which are available world over. However, in India, the only way to put your money in a commodity index would be by investing in a gold ETF. In a gold ETF, the fund invests in physical gold as the underlying asset. If you want an ETF that invests in money market instruments, then you could look at investing in liquid ETFs. However, opportunities in this segment are strictly limited.

WHY AN ETF?

In addition to being the diversifying agent on your portfolio, there is a certain degree of liquidity and flexibility that is available via an ETF. Trading can be done at any point of time during the day through your brokers. Cost-efficiency is also a pertinent point when one talks of ETFs as entry into these funds is available as low costs. For a person who has only small amounts to invest, certain gold ETFs will give him the chance to buy as little as ½ gram of gold. While a person can accumulate a good amount of gold by investing regularly in this manner, he/she does not have deal with problems of storage. A bonus point for gold ETFs particularly is that while physical possession of gold could bring upon wealth tax implications, there is no wealth tax on ETFs. By investing in an index based ETF, you can also hedge the style risk of your fund manager.

Also if you compare the process of investing in an ETF with that of investing in mutual funds, you would have to pay lower management fees for ETFs. As ETFs are listed on the Exchange, distribution and other operational expenses are significantly lower, making it cost effective. These savings in cost are passed on to the investor.

CHECK THE RATIOS

Experts feel that the first step when choosing an ETF would be to look at the costs involved. The expense ratio of the fund is a good indicator for this. Experts recommend that the lower the expense ratio, the better. Another measure that is generally used when considering index funds is tracking error. The tracking error would show how much an the returns of a particular fund deviate from the return given by the index. The lower the tracking error, the better the fund is. A low tracking error could also mean lower costs. Another thing that investors need to ask themselves is whether they want the underlying asset.

RISKS INVOLVED

The risks involved in investing in an ETF are purely systemic risks. Risks in the fund would greatly depend on the risks experienced by the index it tracks. However, investing in a gold ETF may be a benefit in times of market turbulence, as gold often does well during periods of uncertainty.

Popular posts from this blog

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

Mutual Fund Review: HDFC Index Sensex Plus

  In terms of size, HDFC Index Sensex Plus may be one of the smallest offerings from the HDFC stable. But that has not dampened its show, which has beaten the Sensex by a mile in overall returns   HDFC Index Sensex Plus is a passively managed diversified equity scheme with Sensex as its benchmark index. The fund also invests a small proportion of its equity portfolio in non-Sensex scrips. The scheme cannot boast of an impressive size and is one of the smallest in the HDFC basket with assets under management (AUM) of less than 60 crore. PERFORMANCE: Being passively managed and portfolio aligned to that of the benchmark, the performance of the index fund is expected to follow that of the benchmark and in this respect, it has not disappointed investors. Since its launch in July 2002, the fund has outperformed Sensex in overall returns by good margins.    While every 1,000 invested in HDFC Index Sensex Plus in July 2002 is worth 6,130 now, a similar amount invested in Sensex then wo...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

National Savings Certificate

National Savings Certificate Here's everything you need to know about the 5-year savings scheme offered by the Government This is a 5-year small savings scheme of the government. From 1 July 2016, a National Savings Certificate (NSC) can be held in the electronic mode too. Physical pre-printed NSC certificates have been discontinued and replaced with Public Provident Fund-like passbooks. What's on offer The minimum amount you can invest in them is Rs100 and there is no upper limit. Under this scheme, all deposits up to Rs1.5 lakh qualify for deduction under section 80C of the Income-tax Act, 1961. The interest earned is taxable. You can invest in multiples of Rs 100. These certificates can be owned individually, jointly and also on behalf of minors. The interest rates for all small savings schemes are released on a quarterly basis. The effective rate for NSC from 1 October to 31 December is 8%. The interest is calculated on an annual compounding basis and is given along w...

Different types of Mutual Funds

You may not be comfortable investing in the stock market. It might not seem like your cup of tea. But you can start by investing in Mutual Funds. Many first-time investors invest in Mutual Funds. This is because they do not know how to invest in individual securities. Basic information on Mutual Funds People invest their money in stocks, bonds, and other securities through Mutual Funds. Each Fund has different schemes with specific objectives. Professional Fund Managers look after these schemes. Your Fund Manager could help you invest in a scheme that suits your financial goal. Functioning of Mutual Funds You could make money through Mutual Funds in different ways. A single Mutual Fund could hold many different stocks, bonds, and debentures. This minimizes the risk by spreading out your investment. You could earn dividends from stocks and interest from bonds. You could also earn capital by selling securities when their price increases. Usually, you could choose to sell your share any t...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now