What is an ETF(Exchange Traded Fund)?

After the popularity of mutual funds in the last two decades here came an interesting investing object ETFs. ETFs make an investment in stocks of a particular index in the same weightage as of index which it follows. In an easy way, ETFs can be said as mutual funds that can be traded like stocks. ETFs can be traded at exchanges and the price depends on the buy and sells of units. Eg. Nifty ETF.

How does ETFs work?

Firstly the AMC buys the stocks with the same weightage as of index which the ETF will be following. Then these shares are divided into small units so that they can be distributed among the investors. And finally, these shares are then allotted to the investors. In case of more demand, the AMC can issue more shares and in case of low demand, the people can sell their shares back to the AMC.

And after the allocation is done the AMC(Asset Management Company) which sponsors the ETF will list

Types of ETF

There are mainly three types of ETFs, (1) Index ETF, (2) Commodity ETF, and (3)Bond ETF.

(1) Index ETF

Index ETFs are like index funds in mutual funds, for explaining this in a better way let us take the help of an example of Nifty ETF, in Nifty ETF the funds allocated to nifty stocks with the same weightage as of nifty stocks in the index. Index ETFs are the most common ETF as most of the ETFs today are Index ETFs.

(2) Commodity ETF

Commodity ETF invests in commodities like Gold, Silver, etc., now arises a question that how does it work? Let us take an example of Gold ETF, so the ETF sponsoring AMC buys out gold in the form of Bullion. One unit of Gold ETF is equal to one gram of gold.

(3) Bond ETF

Bond ETFs are like bond mutual funds, the fund manager makes a portfolio of bonds and lists them on exchanges. Eg. Bharat Bond ETF

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Advantage and disadvantages

Advantages

→As ETF traded on exchanges it can be easy to purchase it

→ETFs are also suitable for investors with a small corpus.

→Taxation on ETF is the same as the tax on stocks.

→Aas ETFs tracks diversified products like Nifty 50, Gold, etc.

→No fund manager therefore no fear of any error done by him/her.

→Fees to be paid to AMC is lower than Mutual Fund

Disadvantages

→Trading fees to be paid to stock exchanges, and a broker. Even some fees are to be paid to the AMC managing it.

→Cannot be purchased in single units, only purchase in lots is allowed.

→Prices of the ETFs fluctuate a lot due

ETFs vs mutual fund

Mutual Funds can be bought and sold once per day whereas in the case of ETFs they can be brought and sold multiple times in day within the trading hours. Intraday trading is possible in the case of ETFs whereas in the case of Mutual Funds intraday trading is not possible. Units of mutual funds are purchased through Mutual Fund Companies whereas ETFs can be purchased through stock exchanges. High transaction fees in case of mutual funds whereas in case of ETFs buying/selling fees are paid to the exchange. Higher tax in gains of the mutual fund than ETFs. SIPs are not possible in the case of ETFs whereas in the case of mutual funds automatic sip is possible in which the holder doesn't have to manually purchase some units every month

Tax on ETFs

Taxation on ETFs is very much similar to taxation on stocks. When the ETF is held by an investor for less than 1 year then that gain comes under short term capital gain, so for short term capital gain tax is 15%. When the ETF is held by more than 1 year then that gain comes under long-term capital gain, so for a short-term capital gain, the tax is 10%. When the capital gain is less than Rs.1 lakh in long-term capital gain then that will be free of taxes.

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How to buy an ETF?

Investing in ETFs is as simple as buying stocks. Follow the steps given below:

Step 1: Open a Demat account with any Indian stockbroker(I prefer Zerodha which is India's No.1 Stock Broker. Click the link to open an account in Zerodha: Zerodha).

Step 2: Then add funds for the purchase of ETFs.

Step 3: The search for the ETF you want to buy.

Step 4: Add the quantity you want to trade.

Step 5: Click on Buy/Sell

(Note: ETFs are traded in lots).

Best ETFs

(1) Motilal Oswal Nasdaq 100: This ETF tracks the index Nasdaq 100 which tracks the top 100 companies on Nasdaq. This ETF delivered returns of 39.02% in one year.

(2) Nippon India ETF Nifty BeES: This ETF tracks the Nifty 50 index which tracks the top 50 companies listed on NSE. This ETF delivered returns of 24.38% in one year.

(3) UTI Gold Exchange Traded Fund: As its name suggests that it tracks Gold. This ETF delivered returns of 26.01% in one year.

That's all about ETF

Until next BlueSten Markets Update...

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