- Date : 04/05/2022
- Read: 7 mins
There are so many AMCs offering so many Exchange Traded Funds (ETFs). Identifying which ETF to invest in can be an uphill task. We aim to make things easier by publishing information about the best ETFs, how to invest in them, and everything else you need to know.
Some of the top-ranking Exchange-Traded Funds to invest in India include the CPSE ETF, with its one year returns of 60.44%, the ICICI Prudential Bharat 22 ETF, which gives 41.73% returns for a year, the Nippon India ETF PSU Bank BeES which gives you 33.29% returns, the Kotak PSU Bank ETF, with 33.09% returns, etc.
Best ETFs for investment in India
Exchange Traded Funds (ETFs) – FAQs
1) What is an Exchange Traded Fund (ETF)?
An Exchange Traded Fund (ETF) is a financial security that tracks or replicates the performance of an underlying asset. The underlying asset can be an equity index, gold, or other commodities, bonds, etc. The ETF mirrors the performance of the underlying asset, also known as the benchmark. If the benchmark is an index, say, Nifty 50, the ETF invests in all the index securities as per their weightage in the index.
2) What are the different types of ETFs available in India?
Types of ETFs available in India include equity ETFs, gold ETFs, debt ETFs, and international ETFs.
- Equity ETFs: An equity ETF tracks the performance of an equity index. The index can be the Nifty 50 (e.g. SBI ETF Nifty 50), a broader index such as Nifty Midcap 150 (e.g. Nippon India ETF Nifty Midcap 150), a sectoral index such as Nifty Bank (e.g. Kotak Banking ETF), or a thematic index such as Nifty India Consumption (e.g. Nippon India ETF Consumption), etc.
- Commodity ETFs: A commodity ETF tracks the performance of a commodity such as gold. Some examples of gold ETFs include Birla Sun Life Gold ETF, SBI Gold ETF, Axis Gold ETF, etc.
- Debt ETFs: A debt ETF tracks the performance of a debt security. Some examples of debt ETFs include Bharat Bond ETF – April 2030 that tracks the performance of the Nifty Bharat Bond Index, LIC MF G-Sec Long Term ETF that tracks the performance of the Nifty 8-13 year G-Sec Index, DSP Liquid ETF that tracks the performance of Nifty 1D Rate Index, etc.
- International ETFs: An international ETF tracks the performance of an index belonging to a foreign country. Some examples include MOSt Shares NASDAQ 100 that tracks the Nasdaq 100 Index, Nippon India ETF Hang Seng BeES that tracks the Hang Seng Index.
3) What is the process of buying ETFs?
ETFs are offered by Asset Management Companies (AMCs). You can invest in ETFs either at the time of the New Fund Offering (NFO) or buy them directly from the secondary market.
- New Fund Offering (NFO): The AMC offering the ETF announces the NFO dates. You can subscribe to the ETF by filling the application form. Once the NFO closes, the AMC will allot the ETF units.
- Secondary market: Once the NFO closes and the allotment to subscribers is completed, the ETF units are listed on stock exchanges like BSE and NSE. The trading of ETF units happens during market hours, just like equity shares. You can buy the ETF units through your stockbroker by placing an order from your trading account.
4) Is a demat account required for ETFs?
Yes, a demat account is required for investing in ETFs. You can place a buy order from your trading account. During the settlement process, your trading/bank account will be debited with the transaction amount, and the ETF units will be credited to your demat account. For selling ETF units, you have to place the sell order from your trading account. During the settlement process, the ETF units will be debited from your demat account, and your bank/trading account will be credited with the transaction amount.
5) What are the key advantages of ETFs?
Let’s look at some of the main advantages of ETFs:
- Low expense ratio: The expense ratio of ETFs is low as compared to active mutual fund schemes. For most active mutual fund schemes, the expense ratio will range between 1.5% and 2.5%. But for an ETF, the expense ratio is usually less than 1%.
- Real-time price discovery: In the case of other mutual fund schemes, the net asset value (NAV) at the end of the day is applied to the units bought by you. But in the case of ETFs, the trading of units happens on a real-time basis during market hours. As soon as your transaction is executed, you will know the price at which it was done.
- Diversification: ETFs like those based on broader indices such as Nifty 50 give you exposure to a basket of 50 stocks. The Nifty 50 stocks represent more than 20 different sectors of the economy. So, ETFs give you diversification, which is essential for every investor.
- Low minimum investment: While buying and selling ETFs, the minimum number of units to be bought/sold is 1 unit. Hence, the minimum investment amount required for ETFs is very low and affordable to people across income categories.
- No fund manager bias: In an active fund, the fund manager decides which securities to buy, how many to buy, when to buy, at what price to buy, etc. All these decisions are dependent on the fund manager. Human decisions can be biased and can influence the returns of the scheme in an adverse manner. However, in the case of an ETF with a benchmark such as Nifty 50, the fund manager has to invest the ETF money in all the Nifty 50 constituents as per their weightage. This removes ‘fund manager bias’ as they have no say in which securities to buy, how many to buy, when to buy, at what price to buy, etc.
6) What are some of the disadvantages of ETFs?
ETFs do come with some disadvantages:
- Demat account needed: Investing in ETFs requires you to have a demat account, which is not the case with other mutual fund schemes. A demat account comes with account opening charges and annual maintenance charges. Also, for executing ETF buying and selling orders, you will have to pay brokerage.
- Low liquidity: The trading volumes in the case of some ETFs are low. Due to low liquidity, when buying ETF units, you may have to pay a premium to NAV. Similarly, due to low liquidity, when selling ETF units, you may have to sell them at a discount to NAV.
- No SIP mode of investment: In the case of active mutual fund schemes, you can invest in them through systematic investment plans (SIPs). But in the case of ETFs, the SIP mode of investment is not available. Whenever you want to invest in ETFs, you have to buy the units from the market by placing an order from your trading account.
7) What are the factors one should consider while investing in an ETF?
Here are some key factors you should consider while investing in ETFs:
- Expense ratio: When choosing between two ETFs with the same benchmark, say Nifty 50, you should give preference to the ETF with a lower expense ratio. The general rule is, the lower the expense ratio, the better.
- Tracking error: The returns given by an ETF may not exactly match the returns given by the benchmark. It happens because the fund manager may keep some cash to meet daily operations. The difference between the benchmark returns and the ETF returns is known as tracking error. When choosing between two ETFs with the same benchmark, say Nifty 50, you should give preference to the ETF with a lower tracking error. The general rule is, the lower the tracking error, the better.
- Assets Under Management (AUM): You should ideally choose an ETF with a higher AUM. Bigger schemes may be subject to lower volatility. However, you should always give more preference to expense ratio and tracking error than AUM while choosing ETFs for investment.
8) What are some of the ETFs, based on various indices, that are available for investment in India?
Here is a list of some ETFs based on various indices, available for investment in India:
(Source: NSE Passive Investing Quarterly Update)
Note: The AUM is as of 30 June 2021