Exchange Traded Funds

One of the major trends in India’s asset management indIndiatry is the rise, growth and popularity of exchange traded funds.

What are Exchange Traded Funds?

Exchange traded funds are baskets of stocks, units of which can be bought and sold on the exchange as if they were individual stocks.  The stocks which comprise of an exchange traded fund (ETF) that typically reflects composition of a market index.

Exchange traded funds India could reflect the Sensex, the Nifty, the Bankex or any other index.  The price at which the ETF trades is based on the values of the underlying stocks which it represents.  Benchmark Mutual Fund launched India’s first exchange traded fund in 2001- the Nifty Benchmark Exchange Traded Scheme (Nifty BEes).
Exchange traded funds India have not restricted their investments only to stocks.  There are ETFs which invest in commodities, billion, currencies and so on.  In fact, gold exchange traded funds are very popular in India.

Gold Exchange Traded Funds India

In India, gold is associated with safety, religioIndia sentiments and statIndia.  This makes India the world’s largest consumer of gold.  The Benchmark Mutual Fund was the first to introduce the gold ETF in India in 2007.  Today there are eight gold ETFs together holding more than 11 tons of gold.

Reasons for popularity of Exchange Traded Funds in India

  • India has a plethora of mutual funds and investors are hardly able to differentiate between them.  The concept of an exchange traded fund is much simpler and unlike mutual funds, investors are able to easily buy and sell them in the market.
  • Individual investors may invest in stocks which are illiquid.  When the markets are in turmoil, they find it difficult to find an exit route.  An ETF, by virtue of tracking a market index has stocks which trade in high volume.  So there is liquidity even in difficult times.

Problems associated with Exchange Traded Funds India

Though exchange traded funds India are quite popular, the number and size of India specific ETFs are small compared to other countries like Brazil and China.  This may be due to problems like regulatory issues.

How Exchange Traded Funds India help stock markets

ETFs invest heavily in large cap index stocks pIndiahing up their prices.  When these stocks become expensive, stock investors move to the comparatively cheap non index stocks and in the process their prices too move upward.

Differences between Exchange Traded Funds India and Indian Mutual Funds

  • Exchange traded funds generally track indices and are passively managed whereas mutual funds are actively managed.  Passive management helps ETFs save on management fees and capital gains tax.  The expense ratio of ETFs is therefore quite low compared to that of mutual funds.
  • ETFs disclose their holdings on a daily basis ensuring transparency.  Mutual funds are not so transparent and declare their holdings once a month or quarter.
  • An exchange traded fund is bought and sold like a stock on the exchange.  The ETF investor has to have a demat account.  On the other hand, a mutual fund investor can buy and sell mutual fund units only through the fund’s AMC.
  • Since an ETF trades like a stock, buying and selling takes place at realtime prices.  Mutual funds are not quoted on the exchange and are bought and sold at the Net Asset Value (NAV) which is determined by the closing stock prices of the day.

Exchange traded funds India combine the best features of stocks and mutual funds and offer investors is simple and convenient investment opportunity.  Small investors are able to invest in diverse sectors and in different asset classes.

As Indian bIndiainess keeps improving and investments in India get more and more attractive, exchange traded funds India will surely get even more popular.