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Invest in ETFs
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Exchange traded funds are the next big thing, a product which should have done well earlier but will definitely do now. Just as the name suggests, an exchange-traded fund, or an ETF, is essentially a fund that is traded on the exchanges. Since it trades like an equity share, it is easy for all investors to buy and sell. They have a nomenclature similar to funds because they too track a basket of assets like the nifty or banking stocks or even gold. As the price of the underlying investment changes, so does the price of ETF on trading screens.
In India, we are well positioned to take advantage of this vehicle for investment. It provides instant diversification and as an equity investor; it is just like buying another share. It is also noteworthy that expense ratios of ETFs are lower than that of most mutual funds. Just like shares, ETFs are also available in demat form by default. And the brokerage commission is the same as you would pay when you buy or sell a share.It must be noted that while a mutual fund has its net asset value (NAV) calculated every day , the ETF does not need it because its price pretty much changes on a real-time basis along with its constituents or underlying assets.
There are several types of ETFs available for investment and not all have equities as an underlying asset but are fairly popular among investors. For example, gold ETFs, which track the price of gold, are a popular investment vehicle and instead of buying gold futures on the commodity exchanges, one can easily use the existing equity trading account with his or her broker to invest in the metal on the NSE or the BSE. We also have a popular ETF that tracks the money market while there are some other ETFs, which track the banking index. Nifty ETFs possibly outsell all other ETFs combined in India.
In developed countries, ETFs are extremely popular, especially with retail investors. Large investors can buy through the exchange or even directly from the fund. Of course, ETFs have evolved over the years since they were introduced in the US more than 20 years ago while they have been available in Europe for the last 15 years. Initially, there were only index funds but the last several years have seen much creativity on this front, including actively managed funds.
You should consider investing in ETFs for a variety of reasons, including the ease of trade and implicit diversification. No new mutual fund KYC forms have to be filled and the minimum investment is just one unit, which is typically a few hundred rupees. It will lie in your demat account just like a share while providing the diversification of a mutual fund. All tax benefits to stocks like long-term gains currently apply to ETFs. Please note that while closed-ended mutual funds are also listed on the exchange, they are usually illiquid and are quoted at a discount to the NAV. They are also not fully transparent like ETFs, which provide automatic real-time portfolio disclosure. Listed closed-ended mutual funds cannot create more units because they have a fixed fund size. Significantly, ETFs also allow for intraday trading because their prices change real time. One similarity is that the dividends received may be reinvested in the scheme or distributed to investors. Just like mutual funds, there is likelihood of tracking error in ETFs too i.e. the price may not reflect the actual NAV for a brief interval. Investors can now choose from a variety of ETFs listed on our stock exchanges. The most liquid ones are the Nifty ETF, gold ETF and the money market ETF. The ETFs which provide international exposure, much needed in today's globalized world, currently have limited liquidity . But the expansion of this market is a matter to time. Do keep an eye on them for diversification of your portfolio.
US listed ETFs, which track Indian equities, are not really popular yet but could take off considering the popularity of similar ETFs that track stocks of Chinese companies. Once global interest increases in India-dedicated ETFs listed overseas, it will translate into more fund flow into India. Meanwhile, Indian investors can look forward to more sectoral ETFs, which are a logical extension of the current set. Some of the obvious themes are exporting companies, manufacturing companies (given the Prime Minister's announcements on I-Day), infrastructure and IT. Similarly, midcap ETFs could be popular too as midcaps are central to India's growth story. The CPSE ETF, which invested in public sector enterprises, was a successful divestment effort and will surely see more such launches.
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