Nifty ETF

Exchange Traded Funds (ETF's)

In recent times, Exchange-traded funds (ETFs) have gained a wider acceptance as financial instruments whose unique advantages over mutual funds have caught the eye of many an investor. These instruments are beneficial for Investors that find it difficult to master the tricks of the trade of analyzing and picking stocks for their portfolio. Various mutual funds provide ETF products that attempt to replicate the indices on NSE, so as to provide returns that closely correspond to the total returns of the securities represented in the index. ETF's available on NSE are diverse lot. Equity, Debt, Gold and International Indices ETF's are available.

What is an Exchange Traded Fund?

An Exchange Traded Fund (ETF) is like a mutual fund that tracks an index, a commodity or a basket of assets, but trades like a stock on a stock exchange.

 • ETFs are similar in many ways to traditional mutual funds, except that shares in an ETF can be bought and sold throughout the day like stocks on a stock exchange through a broker-dealer.

 • Unlike traditional mutual funds, the ETFs are not bought and sold at the Net Asset Value (NAV); but are traded on the stock exchange at a market determined prices which is close to the NAV of the fund.

 The first ETF in India was listed on the National Stock Exchange of India Limited (NSE) and was based on the flagship Nifty 50 index of NSE. Subsequently several indices were made available for investment to retail investors through the ETF route. Currently 39 ETFs are listed on NSE.

What are the di­fferent types of ETFs?

In India we have three broad categories of ETFs that have been listed:

1. Index ETF

2. Commodity ETF

3. Liquid ETF

§  An Index ETF is based on an index published by the exchange, for example the Nifty or the Junior Nifty indices.

These ETFs allow investors to invest their money in a basket of stocks in an index at a very small amount, usually one tenth (1/10th) of the index value.

Nifty ETF – approx. ` 800 per ETF unit.

§  A Commodity ETF like Gold ETF allows the investors to invest in the commodity directly from the stock market without the need to open a commodities trading account. Also it allows investment at a smaller ticket size as compared to the typical commodity market ticket size.

§  The Liquid ETF offers an easy route for parking idle funds. Using the Liquid ETF the investors can ensure that their money earns interest even for the idle time when it is not invested in other assets.

How to Invest in ETFs?

Trading in ETFs is very simple. It is similar to how you trade in equity shares.

1) For existing Investors, Trade from your existing trading account with your broker.

2) For new Investors, Register yourself with a NSE broker

            a. Fill up the KYC form.

            b. Open a demat account.

            c. Make payment and then commence trading.

Select an ETF àPlace an Order Log into your Trading A/c or call your NSE broker àPlace an Order.

ETFs are in dematerialized form and settled like any other share in the T+2 rolling settlement.

Reasons:

1.Why Nifty ETF is a good entry vehicle for first time investor?

àSimplicity- Invest in Nifty ETF - Your easy and simple gateway to invest in stock markets.

A single unit of Nifty ETF gives you an exposure to the topmost 50 companies of India for just `800*

• No need to go through large information to select a stock.

• Each Nifty ETF unit allows you to invest your money into a well-diversi ed list of top 50 companies. You can buy a unit of Nifty ETF on NSE by simply placing an order with your broker or through your online trading account.

•Nifty ETF is typically priced at 1/10th of the Nifty index value.

 The price of `800, assuming Nifty index is at 8000 points.

2.Why an ETF is better than a mutual fund?

àLower expense ratio

1. An ETF does not need to have an expensive fund manager to pick stocks because the stocks held by an ETF are exactly the same as the underlying index.

2. Moreover, there are no commissions to be paid like in a traditional mutual fund.

3. An ETF does not churn stocks very frequently. All these ensure that ETFs are able to charge lower expense ratios on your investments, which translates into better returns with your money being invested in the fund rather than being spent. This is especially more relevant when the funds are invested for a longer time frame. The cumulative expenses will eat faster into a traditional mutual fund as compared to an ETF with lower expense ratios.

àPay capital gains tax only when you actually make capital gains

1. A mutual fund may realize a capital gain by selling o an appreciated stock. As an investor you stand to lose because you pay the capital gains tax regardless of whether you sell your holdings and regardless of whether the share price of the mutual fund increases or decreases since the time you bought it.

2. In case of ETFs, such losses are very unlikely to happen, because most ETFs have little turnover to create capital gains.

3. Moreover, ETFs are structured in a way that largely insulates shareholders from capital gains that result when mutual funds are forced to sell in order to free up cash to pay o investors who cash out.

3.Why investing in Gold ETF is better than investing in physical gold?

àNo doubt about the quality of gold

àNo fear of losing or theft

àEasy liquidity

Gold ETF was introduced in 2007 and it oered an easy way for investors to invest in their favourite commodity.

A unit of Gold ETF represents one gram of pure gold. Through the Gold ETF you can invest in gold one gram at a time and you can keep accumulating it over a period without taking any eort to physically maintain it.

The Gold ETF units are held electronically in your demat account and the underlying actual gold is held in safe vaults maintained by specialized agencies who undertake to ensure the safety of the gold.

As the Gold ETF is traded on the exchange an investor can buy and sell anytime during the market hours at the screen price. Unlike physical gold market there is no making charges  for  purchase or depreciation for selling gold. The price that you see is the price you get.

The gold held by a Gold ETF is typically of  995  purity or higher.

4.That make ETF better than Fixed Deposits.

àTrack record of better long term returns

 àBeats ininflation, delivers REAL RETURNS

àEasy liquidity

àTax Free on sale beyond one year

• The stock market has a track record of generating better returns as compared to the fixed deposits over a long time frame.

• Given the high rate of inflation most fixed return investments generate a negative or very low real return i.e. the actual returns earned after accounting for the inflation in the corresponding period. For example, if a fixed deposit for one year gives 9% returns and the inflation during the corresponding period was 8%, the real return for that one year would be only 1%.

• The fixed deposits have a limited liquidity. Though you are able to get your capital back whenever required, you typically lose most of your interest if you withdraw prematurely. This is not the case with ETFs. The ETFs allow an investor to stay invested as long as he wishes and there are no maturity dates or related penalties.

• Gains generated from an ETF are tax free after one year unlike in the case of fixed deposits where the interest earned is taxable at your existing tax slab rate.

5.Why ETFs are much better long term investment instruments than Real Estate?

àPrice transparency

àClear title Easy liquidity

àNo tax on sale beyond one year

àNo maintenance

ETFs are traded on the exchange like any other product. You get the price that you see. There is a complete price transparency.

NSE guarantees the settlement of your transactions. You are assured of your transactions.

NSE is the most preferred Exchange in India and abroad ensuring ample liquidity in the markets. Unlike a real estate investment which may take several days or even months to get liquidated at a price which is not transparent, ETFs can be instantly bought and sold on the exchange.

Real estate investments are subject to capital gains tax whereas all gains in ETFs are tax free beyond one year of holding.

No additional charges are required for ETF investments. Your existing   demat account is good enough to hold all your ETF investments.