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Investing in ETFs or exchange-traded funds is equivalent to investing in all constituents that are part of an index directly. The yields or returns generated by ETFs replicate the benchmark index. It gives investors an opportunity to benefit from diversity, flexibility and scope for growth that comes from ETFs being traded on stock exchanges. Most ETFs in India are categorized based on the underlying asset held in the portfolio; some are Nifty and Sensex-based while others are their variants.
Kinds of ETFs
1. Equity ETFs
Equity ETFs are the most popular at present and they generally track Nifty 50 and its other variants. Some of the examples are DSP Nifty 50 ETF, ICICI Pru Nifty 100 ETF, Nippon India ETF Nifty Midcap 150, Motilal Oswal Midcap 100 ETF and Aditya BSL Nifty Next 50 ETF. There are a total of 89 equity ETF schemes available for investment with Nippon India ETF Nifty BeES being the oldest.
Differences of Equity ETFs vis-a-vis mutual funds.
| Equity ETFs | Mutual Funds |
|---|---|
| Traded in stock markets throughout the trading hours on a working day. | There is no trading involved. |
| Prices are determined by market movements and are dynamic; they keep changing continuously during market hours. | The NAVs of MF schemes are calculated at the end of each day post the market closure hours. |
| There is no cap on the minimum investment amount and the minimum investment quantum is one unit. | There is a minimum investment amount which is usually INR 1,000. The number of units available for that amount could even contain fractions of units. |
| ETFs allow investors to benefit from intraday movements in the markets. | This is not possible even in open-ended mutual funds. |
| There is no scope to avail Dividend or Dividend re-investment options. Only the growth option is available in ETFs. | An investor can choose between dividend or dividend reinvestment option in addition to the growth option. |
| Low expense ratio. | High expense ratio. |
| Sale proceeds are received on a T+2 basis and are as per the equity share trading norms. | Redemption proceeds are received on a T+3 day basis and are credited directly to your bank account. |
2. Bond ETF
Bond ETFs are typically designed to provide exposure to fixed income instruments like debentures and government bonds having various maturities. Bond ETFs combine the benefits of debt investments with the flexibility of stock investments and the simplicity of mutual funds. Examples of debt ETFs are government securities (G-Secs) and the Nifty Bharat Bond.
There are a total 13 bond ETFs and Nippon India ETF Liquid BeES is the oldest. With the launch of Bharat Bond ETF April 2032 in December 2021 the total count of Bharat Bond ETF tranches is five.
There are several differences between bond ETFs and fixed income instruments:
| Bond ETFs | Fixed Deposits |
|---|---|
| Traded in open cash markets throughout the day on stock exchanges, like any company stock. | There is no scope for trading. |
| Exposed to mark-to-market due to changes in the interest rates in the economy. | A predetermined interest rate is fixed for different investment terms. |
| There is no cap on the minimum investment amount and the minimum investment is one unit. | One-time lumpsum investment is required and there are no units allotted. |
| No interest is paid to the investor. | Interest is paid monthly/quarterly, etc. as per the investor’s choice. |
| Investing in bond ETFs means investing across maturities and various debt instruments. | The investment is for a fixed maturity in only one debt instrument. |
| Tax efficient as there is an indexation benefit. Taxed at 20% post indexation when held for more than 3 years. | The interest income earned on FDs is taxed as per income tax slabs. |
3. Commodity ETF
In India, the commodity ETFs available currently are gold and silver ETF that try to replicate their respective bullion markets. No other commodity ETFs are presently available to invest in the Indian markets. There are a total of 12 schemes and Nippon India ETF Gold BeES is the oldest scheme among the commodity ETFs.
Gold ETFs provide investors with the opportunity to invest in precious metals in the digital format instead of investing in physical gold. Gold ETFs track the price of gold in the market.
There are many notable differences between physical gold investment and Gold ETFs:
| Gold ETF | Physical Gold |
|---|---|
| Each unit of gold in the ETF you can buy is equal to one gram of gold. | No units are allotted, you buy it in grams. |
| Purchase and trade directly on stock exchanges. | You buy it from jewelry stores. |
| The purity of Gold ETF is of 0.995 purity. | The purity of physical gold differs. |
| The price of ETF is on a real time basis and it trades close to the fair market price of gold. | The price differs with each jeweler and the lesser you buy the more you pay per gram. |
| Easy and convenient to store in a demat account and there is no risk of theft. | Requires a locker for storage to protect from the risk of physical gold getting stolen. |
| On redemption, the proceeds are available on a T+6 basis. | On selling physical gold, you get the amount instantly. |
In terms of taxation, Gold ETFs are taxed like physical gold, i.e., like non-equity. If you sell your Gold ETF units within three years of purchase, short-term capital gains (STCG) tax is levied based on your income tax slab. However, if you sell your Gold ETF units beyond three years from the date of purchase, a 20% long-term capital gains (LTCG) tax with indexation is applicable, i.e., adjusting for inflation on capital gains is applicable.
Recently, several notable fund houses like Nippon India, ICICI Prudential and Aditya Birla launched silver ETFs. Silver ETFs are also good investment alternatives to gold ETFs for portfolio diversification.
4. Sectoral / Thematic ETF
A sectoral or thematic ETF is designed to replicate the performance of a particular sector. Kotak IT ETF, ICICI Prudential Nifty Auto ETF, Axis Banking ETF, SBI ETF Consumption, and Aditya BSL Nifty Healthcare ETF are few examples of such ETFs. These are different from equity as discussed above in the Equity ETF section.
5. International ETFs
An international ETF gives investors the opportunity to invest directly in foreign companies. It tries to mirror the index of global markets or any country specific index. Examples are MOSL NASDAQ 100, HDFC World Index Fund, Mirae Asset NYSE FANG+ETF
There are several differences between international ETFs and direct investment in international stocks.
| International ETF | International stock direct investment (US markets) |
|---|---|
| Investing in International ETFs is similar to investing in an international equity mutual fund. | Here you need to open an account with a broker who has a tie-up with an international brokerage outfit. |
| The price is determined at the end of the day, based on the region specific timelines. | The price of stocks is determined by demand and supply of market participants. |
| It is treated as non-equity for taxation purposes: • If you sell your unit within three years, short term capital gains (STCG) tax is levied based on your income tax slab. • If you sell your unit beyond three years, a 20% long term capital gains (LTCG) tax with indexation. | For taxation purposes: • If you sell within two years a short term capital gains tax is levied as per tax slabs. • If you sell after two years, it is considered as long-term capital gains and 20% + surcharge and fees are levied. |
| Very easy to invest as it allows investment in INR as well as for very low amounts. | Cumbersome as a remittance is required to be made in foreign currency and could be expensive. |
| No income option. | Has a dividend income option. |
How to Invest In ETFs?
ETFs are traded like equity on the stock exchange. The trading price changes throughout the day as there are buyers and sellers that drive the demand and supply of the ETFs. The price of these products can be like a NAV of the underlying assets they represent. Every ETF is assigned a unique ISIN number and therefore, you can hold the units of ETFs in your demat account.
You can directly place an order on the stock exchange or AMC’s terminal to buy ETF units, depending on the market conditions. The units get credited to your account based on the clearing day of the type of ETF you have bought.
For example if you have placed an order to buy 10 units of an equity ETF for INR 5,000, the price will fluctuate the entire day depending on the price variation of stocks held in the equity ETF. The units will get credited into your demat account on day T+3.
Similarly, when you wish to sell your equity ETF units, you can place a sell order on your trading platform, like you would for equity shares.
Bottom Line
In India, investing in ETFs is witnessing traction; the AUM of ETFs for February 2022 was INR 4.05 crore and various ETFs of different types are emerging. It is easy to invest in an ETF but before investing, ensure that you choose the one that suits your financial plan the most.
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Juzer GabajiwalaContributor
Juzer Gabajiwala has over 20 years in the field of investments and finance. He joined Ventura Securities Limited in 2005 as head of mutual fund products distribution and has been Director at the company since 2008. In the past, he has worked with Larsen and Toubro Limited, Telco Dealers Leasing and Finance Limited, IIT Capital Services Limited and Premchand Group.
Aashika JainEditor
Aashika is the India Editor for Forbes Advisor. Her 15-year business and finance journalism stint has led her to report, write, edit and lead teams covering public investing, private investing and personal investing both in India and overseas. She has previously worked at CNBC-TV18, Thomson Reuters, The Economic Times and Entrepreneur.
