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  • Category: Finance and Investments

    Want to know about Exchange Traded Funds (ETFs)?


    Have a query about ETFs- Exchange Traded Funds? Looking out a detailed explanation regarding from where to purchase or where to redeem when needed? On this Ask Expert page you can go through the responses and resolve your queries.

    What are Exchange Traded Funds (ETFs)? How can a common retail investor invest in ETFs in India? Can an investor purchase units of ETF through mutual fund company websites portals? Can he/she redeem the purchased units of ETF through these websites later? Or are the ETF units bought and sold only through Demat Account?

    Kindly explain in detail.
  • Answers

    3 Answers found.
  • What are Exchange Traded Funds (ETFs)?

    ETFs are like shares of a company, the difference being it is focussed on an entity, a commodity ( eg: gold) or a basket of items (oil and associated products, a group of precious metals), For instance, the DB commodity index tracking ETF tracks 14 commodities.In contrast, the gold bees ETF focuses on gold.

    Pure ETFs do not have a NAV like in mutual funds and the ETFs are bought and sold like shares on a daily basis and the price is at the point of time when you buy. Generally, the cost of maintenance of ETF is less than that of mutual funds. To deal with physical commodity or pure commodity has it's own risks, hence people choose ETF an a middle option of investment.

    The prime attraction of ETF is its liquidity and the less cost of purchase in comparison to MF in the same class (gold, bank, pharma etc)

    How can a common retail investor invest in ETFs in India?
    One needs to have a trading account ( an account to activate buy and sell orders) and a demat account (to hold what you have bought in e form) to buy ETFs just like we do for shares. If you have a stockbroker, he/she can do it for you.

    Can an investor purchase units of ETF through mutual fund company websites portals? Can he/she redeem the purchased units of ETF through these websites later? Or are the ETF units bought and sold only through Demat Account?

    I would prefer to do it via your own trading and demat account because it would have a more direct route and have nominee details all take care of. Most companies like Kotak securities etc offer this service.

  • ETF(Exchange Trade Fund) is also like mutual fund(Index Fund). It is pooled investment vehicle that offers diversified coverage to a specific area of market. It can invest in bonds, currencies, stocks, commodities, blend of assets. ETFs are cash market product and trades in the capital market segment. There are various kind of ETF available in India such as Equity ETF, Global Indices ETF, Gold ETF and Bond/Debt ETF. The examples of equity type of ETF is ICICI prudential NIFTY ETF which follows 50 NIFTY index and Kotak Banking ETF follow NIFTY Bank Index. There is a low risk in ETF which is the biggest advantage of ETF. Some other advantages are:
    1. You can time the market.
    2. Low fund management fees
    3. Instant diversification at a fractional invest.
    4. Real time buying and selling giving high liquidity
    5. Easy to choose.
    6. ETF will help in diversifying investment risk with easy liquidity.
    7. Entry and exit anytime during market hours
    Disadvantages of ETF:
    1. Liquidity currently could be a risk.
    2. Frequent transaction could add to cost
    3. Comparatively, High fund management charges because of developed markets.

  • ETF is exchange traded fund but is different from mutual fund in many respects. First it does not have a net asset value (NAV) and second it is quoted in the market just like other stocks. People can buy or sell them just like buying or selling stock in the share market.

    These funds comprise of their underlying entities encompassing a large range of assets ranging from commodity to bonds and even funds and indexes. It is a very interesting type of instruments as in case of liquidation the investor will be able to derive a residual value.

    These ETF are to be managed through a demat account or the broker site and can be linked to one's bank account for movement of funds to and fro.

    ETF can announce dividend time to time to its investors.

    The supply of ETF shares is provided by the authorised participants (APs), who are generally big financial houses and the supply is maintained by a process of creation and redemption. It is a continuous process in which to and fro exchange of shares and underlying assets is done between the fund and APs.

    Knowledge is power.


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