Exchange Traded Funds - A resourceful product to invest
across asset classes
Mutual Funds provide an important and convenient way of
financial planning for retail investors due to various
factors such as economies of scale and low costs. In
addition, Mutual Funds also provide investors with an
opportunity to invest across asset classes, sectors and
geographies via various schemes. Further, investors can
diversify their portfolios by following different investment
styles of wealth or fund management, viz., the active style
or the passive style.
Those funds which consistently churn their portfolio and aim
to outperform the market or a benchmark index are called
actively managed funds. In contrast, those funds which aim
to generate returns in line with a benchmark index by
replicating its portfolio are referred to as passively
managed funds.
Exchange Traded Funds (ETFs)
Passively managed funds are best represented through ETFs.
These funds invest into an underlying asset or portfolio of
assets and trade over stock exchanges. The underlying
portfolio may represent an index, securities or commodities.
ETFs can be easily bought / sold anytime during market hours like
any other stock on the exchange. The trading price is
usually close to the fund's actual net asset value (NAV).
Investments in ETFs, however, require investors to hold
share trading and demat accounts.
Investing in ETFs
ETFs can be bought or sold in two ways. But before you begin
to invest in ETFs, it is important that you take into
account the following points:
-
You need to open a trading account with a broker/
sub-broker.
-
You should also have a demat account for holding the
ETF units.
To complete these formalities, you have to be
KYC compliant and required to furnish documents like:
-
Proof of identity:
Passport, Driving License, PAN Card
-
Proof of Address:
Passport, Utility Bill
-
Bank Account Details:
Bank Account Statement
After you complete these formalities, you can buy and sell
ETFs through this account.
You can invest in ETFs by:
-
Buying or selling ETF units through the broker by
telephonic mode or by placing orders on the online
trading terminal provided by the broker. You should
also check whether the broker is registered with the
stock exchange.
-
You can place your order by calling your broker and
informing him about your trade specifications.
-
You can also place your order through online trading
terminal. Trading ETFs is similar to buying and
selling shares on exchanges through the terminal.
Benefits of investing in ETFs:
-
Diversification:
ETFs offer you exposure to a wide range of securities
like an index and are traded like a stock. ETFs help
you spread investment risk over a number of securities
and reduce stock-specific risk. Investment in ETFs can
be looked at as a part of hedging strategy. Depending
upon the ETF scheme, you can gain exposure to a range
of stocks, countries. Sectors, commodities etc in a
single transaction.
-
Transparency:
Most of the ETFs track an index and this would mean
passive management for the fund house to maintain the
ETF portfolio. This makes it easier for the investor
to know performance of the ETF.
-
Portfolio Management:
ETFs help
fund managers
with constant inflow and out flow of funds. ETFs are
liquid investment products that fund managers can
easily buy or sell on exchange. This help in effective
portfolio management for the fund managers.
-
Convenience:
You can buy and sell ETF shares on exchanges by
looking at the market prices available on the trading
portal. ETFs are listed on exchanges that are well
regulated. This has contributed to transparency in
trading ETFs. Also, investors who are unsure of which
investment product to choose can invest in Index ETFs,
which will provide them exposure to the market.
-
Lower Transaction Charges:
ETFs can be traded at much lower cost that what you
would incur on other index tracking products.
Investors who are unsure of which stock to invest in
can invest in a sector-based ETF and benefit from the
sectoral growth by investing a small amount of
capital.
-
Tax Benefits:
Dividends from ETF schemes are tax exempt for
investors. If an investor sells ETFs units before 12
months, he is liable to pay short term capital gain
tax at the rate of 10 percent. At the time of
redemption the investor need not pay tax. They are
also exempt from wealth tax. However, the time of
redemption investors would need to pay securities
transaction tax (STT) at 0.25 percent on the value of
redemption.
-
Arbitrage Opportunities:
ETFs, being index tracking products, can be used to
generate profits out of price differences between ETFs
and other index products like futures etc.
Conclusion
Though Indian ETFs are still at an emerging stage, they are
expected to replicate some of the asset classes that are
offered globally, with gold ETFs the likely leader. Recent
launches, which include differentiated products such as MOSt
Shares NASDAQ 100, Goldman Sachs Hang Seng BeES, Goldman
Sachs S&P Shariah BeES, give investors diverse but
attractive choices across asset classes, investment styles
and geographies. While actively managed funds will continue
to rule in search of higher alpha, passively managed funds
in the form of ETFs can be of able help to investors for
quick diversification across underlying asset class / index.
Disclaimer:
CRISIL Research, a Division of CRISIL Limited has taken due
care and caution in preparing this Report. Information has
been obtained by CRISIL from sources which it considers
reliable. However, CRISIL does not guarantee the accuracy,
adequacy or completeness of any information and is not
responsible for any errors or omissions or for the results
obtained from the use of such information. CRISIL is not
liable for investment decisions which may be based on the
views expressed in this Report. CRISIL especially states
that it has no financial liability whatsoever to the
subscribers/ users/ transmitters/ distributors of this
Report. CRISIL Research operates independently of, and does
not have access to information obtained by CRISIL's Ratings
Division, which may, in its regular operations, obtain
information of a confidential nature which is not available
to CRISIL Research. No part of this Report may be published
/ reproduced in any form without CRISIL's prior written
approval.
This information is given for general purposes only. These
views alone are not sufficient and should not be used for
the development or implementation of an investment strategy.
It should not be construed as investment advice to any
party. All recipients / readers of this material should
before dealing and or taking any decision of investment are
advised to carefully review the Scheme Information Document
and consult their legal, tax and financial advisors before
making an investment decision. All opinions and estimates
included here constitute our view as of this date and are
subject to change without notice.
Mutual Fund Investments are subject to market risks, read
all scheme related documents carefully.
