Exchange-Traded Funds (ETFs)

Exchange-traded funds which are commonly known as ETFs are the flock of securities such as bonds, stocks, gold, foreign currencies, oil, etc. These funds/collections of the securities are traded like shares on the leading stock market. For India, it is traded on BSE and NSE. The ETF stocks are the funds that are owned indirectly by the investors without any direct claim.

The basic nature of the ETF is like the stock but the value it holds is effective. Although it is kind of a mutual fund yet it holds a difference. Unlike mutual funds, the value of the ETF stock changes throughout the day. In simple words- Exchange-traded funds invest your money in the large pool of stocks instead of individual/ particular stock. ETFs are listed on the exchanges, therefore can be traded like stocks.

Why should you invest in ETFs instead of individual stock/stocks?

Exchange-traded funds are the basket of stocks that are pre-defined. The basket is formed to track the indices of the stocks. So if you want to purchase the Nifty50 index stock, you can buy the Nifty 50 ETF instead of purchasing individual 50 stocks.

Benefits of Investing in Exchange Traded Mutual Funds:

Exchange-traded funds are the diversified portfolio of securities and can be traded in the stock market. There are many benefits to invest in ETFs:

  • Instead of tracking the record of a single/ multiple company's equity performances- exchange-traded funds diversify equity investment into different companies.
  • ETF investments dilute the risk. ETFs are invested only in the best-performing companies listed on the stock exchange.
  • In the ETF, if one asset/stock is underperforming, the portfolio is balanced by the growth of other stocks/ assets.
  • ETFs investment allows easy entry and exit because it is traded on the stock market.
  • The change in the ETF value is observed instantly. Thus the ETF can be bought and sold anytime throughout the day.
  • The liquidity in exchange-traded funds is higher than the mutual funds.
  • The ease of liquidity allows you to change the security/ investment choice in case any particular asset in the ETF is/is underperforming.

ETF investment Liquidity:

ETF liquidity compared to the mutual funds have high liquidity thereby making this investment product popular. This makes ETF popular and convenient when it comes to cash flow necessity.

ETF Taxation:

Index ETFs and sectoral ETFs are treated as equity-oriented schemes for the purpose of taxation. Accordingly, short-term capital gains made on ETF units held for less than one year will be taxed at 15%. Long-term capital gains on units held for more than one year will be taxed at 10%, without indexation benefit. Long-term capital gains upto 1 lakh are not taxed.

For taxation purposes, gold ETFs and international ETFs are taxed as non-equity funds. Short terms gains made on ETF units held for a period of less than 36 months are taxed as per the applicable income tax slab rate. Long-term capital gains on units held for over one year are taxed at 20% after indexation benefit. Dividends earned by the ETF investor enjoy the tax exemption from the exchange-traded funds' schemes.

Returns on ETF

The Dividend earned is regularly distributed to ETF holders. Performance of underlying assets determines the performance of the fund. For eg. an index fund will give good returns if the Nifty / Sensex stocks perform well.

Frequently Asked Questions on ETFs:

Analyzing the difference between ETFs and Mutual funds based on the following parameters:

Parameter Mutual Fund
Mutual Fund
Fund (ETF)
Fund Size Flexible Flexible Flexible
NAV Daily Daily Real-Time
Liquidity Provider Fund itself Stock Market Stock Market / Fund itself, either of them.
Sale Price At NAV plus load, if any Significant Premium / Discount to NAV Very close to the actual NAV of the Scheme
Availability Fund itself Through Exchange where listed Through Exchange where listed / Fund itself.
Portfolio Disclosure Monthly Monthly Daily/Real-time
Uses Equitizing cash Equitising cash Equitising Cash, Hedging, & Arbitrage

There are three major types of ETF investments available for investors:

  • Gold ETF: It aims to track the gold price in the Indian market. Gold ETFs are traded on the listed exchange similar to equity trading.
  • Equity ETF: It is the stock basket reflecting the index composition- similar to S&P BSE Sensex.
  • Liquid ETF: It is the money market ETFs whose objective is to provide money market returns to the investor. The first money market ETF in the world is BeES- launched by the mutual fund benchmark.

Please note: All these ETFs are traded on the BSE & NSE.

Following individuals/groups are eligible to invest in ETFs:

  • Individual (Resident of India/ NRI)
  • Institutions
  • Corporate

There are two ways to buy and sell exchange-traded funds. For any investor it is important to consider the following points before investing in ETFs:

  • To open a trading account with the broker/sub-broker.
  • To hold the ETF units, a DEMAT account is a must.

Once the trading & demat account is opened after completing the KYC, you can then discuss the trading specifications with the

There's no bar or range, to begin with, the ETF investments. Ensure to cover the price of the shares, & commission fees if any.

Exchange-traded funds consist of the high-performing companies' stocks in the basket. The stocks in the ETF determine the risk factor of this investment. Because ETF investment diverges, the risk is minimal compare to other equity-related securities. The risk in any investment is measured by market volatility and fluctuations. Thus the risk involved in the ETF investment is little.

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