ETFs provide a real time price discovery for investors and relegate the investment effort to a click of a button. Additionally, the cost of investment is far reduced, and hence they provide an inherent growth advantage
EXCHANGE-traded funds (ETFs), as the emerging mutual product fund segment in India, have positively redefined the value proposition for investors. Despite an increasing overlap of the ETF concept with exchange traded products, the crucial difference is that, ETFs are mutual funds that are available only through exclusive medium of stock exchanges. Thus in contrast to a regular fund, which can be brought or redeemed off the counter or at the exchange, ETFs are available only through the latter.
The underlying asset of an ETF can be any tradable asset: be it stock, commodity, bonds and currency. Currently, in the Indian context, only stock ETFs and gold ETFs have received the regulator and the investor acceptability.
ETFs provide a real time price discovery for investors and relegate the investment effort to a click of a button. Additionally, the cost of investment is far reduced, and therefore provides an inherent growth advantage vis-à-vis other funds. Additionally, many ETFs also provide a passive exposure to assets that otherwise would be out of reach for most investors. Albeit, even actively managed funds are readily available through ETFs.
ETFs, since they are traded on the stock exchange, are subject to the same cost which are applicable to share trading, i.e,: brokerage, STT, demat cost (if any) etc.
In turn, ETF units are only managed by the funds, (actively or passively) and as such invite a lower 'expense ratio' from asset management companies (AMCs). Therefore, the cost of purchasing ETF units is directly dependent on the frequency of entry and exit, as well as the size of acquisition. On the other hand, the entire corpus of a regular mutual fund (most of the time) invites the same cost, irrespective of the size of individual holdings.
The convenience of acquiring, holding and divesting ETFs are also a key feature that make them stand out from the rest. Since ETFs are traded like the stock, the acquisition, valuation and disposal of the investment is real time. Moreover, the price discovery largely tends to be precise, rather than on the end of day basis. This facilitates the investor to utilise the price variations in the underlying asset in a relatively sharp detail and time. Investors can also carry out other features of stock investment in ETFs that is otherwise not feasible in a regular fund. Namely, day trade, short sell, limit order and a potentiality to buy and sell a stock in a single unit.
In the present market context, wherein the market has approached its 2008 peak level, the ease and accessibility of ETFs may come in handy in managing the emerging investment environment.
For instance, increasing liquidity and a largely hawkish interest rate regime have had a variegated effect on the equity markets. The Sensex is trading at around 16X forward PE. This valuation is significantly cheaper than the previous peak of 2008 but still looks stretched from the historical average. Nevertheless, the sharp emergence of Indian equities, and the resultant FII induced liquidity glut, have kept the market momentum going. Also, with the Indian economy maintaining its high growth rate, global flows may continue to find their way into the Indian equities market.
In this backdrop, investors can (subject to the market prognosis) actively allocate corpus between an index ETF and a gold ETF. Additionally, investors can execute their own 'flexible' SIP by self-ascertaining the time and scale of investment depending on the market condition.Also, a potent case for investment in gold ETF remains. A volatile geopolitical setup, an increasingly chary global economy and the rising demand for gold jewellery in India and China are some of the reasons that make investment in gold ETFs a lucrative investment opportunity.
