In today’s rapidly evolving financial landscape, investors are presented with a multitude of options to grow their wealth. One investment vehicle that has gained immense popularity and revolutionized the way individuals approach the markets is the exchange traded funds. In this blog post, we will explore what is etf, the various types available to investors, and their benefits and drawbacks.
“ETFs combine the best of both worlds: the diversification of a mutual fund and the tradability of a stock.” – John Bogle
List of contents
- What is etf?
- Types of etf in India
- Essential factors for selecting the perfect etfs:
- Taxation
- How do I find the list of all etf in India?
- Why choose ETFs for your investment journey?
- Limitations
- Conclusion
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What is etf?
ETF stands for exchange traded fund. ETFs are a combination of stocks and index mutual funds. They are designed to track the performance of a specific index, sector, commodity, or asset class. where the index represents benchmarks such as the Nifty 50, Sensex, Nifty Next 50, and sectoral indices (finance, banking, pharmaceuticals, FMCG, IT, etc.). They collect money from investors and invest it proportionately in the indices they follow.
They trade on stock exchanges like the NSE and BSE, similar to individual stocks. When you buy etfs shares, you gain ownership in a portfolio designed to replicate the performance of its underlying index, allowing you to align your investment with the index’s returns.
Types of etf in India
There are three main types
Equity ETFs:- Equity ETFs, commonly referred to as stock ETFs, are investment funds that aim to replicate the performance of a specific equity index or sector. They allocate their assets predominantly to stocks and track indices like the Nifty 50, Sensex, and sectoral indices Nifty BeES, India’s first etfs launched in 2002, is equity etfs that follows the Nifty index. Sectoral ETFs focus on specific sectors like IT, consumption, and banking, providing exposure to their performance. If you’re looking for a list of all equity ETFs, click here
Debt etf:- A debt etf primarily invests in fixed-income securities such as bonds, including government bonds and corporate bonds. The first debt etf introduced in 2004 was Liquid BeEs. In 2014, the government launched the CPSE etf (central public sector enterprises).
Commodity etf:- Commodity ETFs focus on investing in commodities such as gold, silver, and others. Among the various commodity ETFs, the most popular one is the gold etf. The gold etf, known as GoldBeEs, was the first etfof its kind and was launched in 2007.
Essential factors for selecting the perfect etfs
- Liquidity and Trading Volume: Higher trading volume means it is more liquid, making it easier to buy or sell shares at market prices without significant price fluctuations.
- Tracking error: It is a way to measure how closely an ETF’s performance matches or deviates from the benchmark it’s trying to follow or outperform. It tells you the extent of the difference between what the etfs actually earns and what it was expected to earn. The lower the tracking error, the better the etfs.
- Expense ratio: The ETF provider charges the annual fee to manage the fund, which is known as the expense ratio of an equity ETF. It’s a percentage of the total assets under management and is deducted from the fund’s assets. When selecting an equity ETF, it’s crucial to consider the expense ratio, as higher fees can affect your investment returns. here are some expense ratio given below.
Equity ETF = 0.01 – 0.1%
Sectoral ETF = 0.1 – 0.3%
Debt ETF = 0.1 – 0.3%
Gold ETF= 0.5 – 1%
Taxation
Taxation on etf in India can vary based on the type of ETFs and the holding period. Here are some key points regarding taxation.
- Equity etf: The tax rate for the short-term duration of equity ETFs, which is less than 1 year, is 15%. For long-term durations, held for more than 1 year, the tax rate is 10%. Additionally, there is an exemption for long-term capital gains up to INR 1 lakh.
- Debt and Gold etf: The tax rate for short-term durations of debt and gold ETFs, which are less than 3 years, is as per the income tax slab. However, for long-term durations held for more than 3 years, the tax rate is 20%, and indexation benefits are applicable.
| Type | Short term duration | Short term duration | Long-term tax rate | Indexation benefits | Exemption |
|---|---|---|---|---|---|
| Equity ETF | < 1year | 15% | 10% | not applicable | long term capital gain upto INR 1 lakh |
| Debt ETF | < 3year | as per income tax slab | 20% | applicable | not applicable |
| Gold ETF | < 3year | as per income tax slab | 20% | applicable | not applicable |
How do I find the list of all etf in India?
To find a list of all ETFs listed on the National Stock Exchange (NSE) of India, you can follow these steps:
Step #1) Visit the official website of the NSE: Click here
Step #2) On the homepage, click on the “Markets Data” section on the top menu bar.
Step #3) A dropdown menu will appear. From the Market Watch, click on “Equity & SME Market.”
Step #4) On the next page, click on “exchange traded funds.”
Step #5) This will take you to the ETFs page, where you will find a table that lists all the ETFs traded on the NSE. You can further filter the list by selecting specific ETFs categories, such as Gold ETF, Nifty 50 ETF, etc., by using the “ETFs Categories” dropdown menu.
Why choose etf for your investment journey?
Here are some major points:
- Low expense rate: ETFs generally have lower expense ratios compared to mutual funds. which results in an overall better return.
- Liquidity and Trading Flexibility: ETFs trade on stock exchanges, allowing investors to buy or sell shares at market prices throughout the trading day. This offers liquidity and flexibility, making it easy to enter or exit positions quickly.
Limitations
ETFs have limitations like tracking errors, potential market volatility amplification, and dependence on market liquidity for efficient trading.
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Conclusion
Exchange-traded funds (ETFs) have emerged as a popular and efficient investment vehicle for both novice and experienced investors. Throughout this blog, we have explored the what is etf and various aspects that make etf a compelling option for those seeking diversification, liquidity, and cost-effectiveness.
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