How To Invest In Exchange Traded Funds (ETF) In India

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Exchange Traded Funds
Exchange Traded Funds

ETFs has been accepted well by Indian investors. ETF investing is like stock investing, but with a very interesting difference. In stock investing, analysis of stock is a must before one buys it.

But while investing in ETF, analysis is not as mandatory. One can decide to keep buying ETFs systematically as it is possible in mutual funds SIP. So you don’t have to master any short of technical analysis. Just keep investing in ETF on a periodical basis.

These days almost all mutual fund companies offer ETF’s as their preferred investment product. As a result, people are more than eager to include ETFs as one of the necessary constituent of ones investment portfolio.

Following are the three type of ETFs that are currently in operation in India:

EQUITY ETF
– Index tracking ETF
– Sector (like Bank) tracking ETF

DEBT ETF
– GOLD ETF

INTERNATIONAL ETF
– International index tracking ETF (like Hansen)

Exchange Traded Funds (ETF) automatically became my favorite investment option. When ETF was introduced in India in 2001 it became instant hit.

I always wanted to have a financial product that has a combined advantage of stocks and mutual funds. Stocks are much easier to trade. Mutual funds provide better risk management. Exchange Trade Fund (ETF) is that financial product which has joint advantage of both stocks and mutual funds.

Exchange Traded Funds
Exchange Traded Funds

When the ETF was launched in 2001, huge success was expected. But what happened after that was only a modest success. In America, ETF was first launched way back in 1993 for institutional investors. But today ETF is worth more than $2.1T in asset. Even in Europe, ETF is one of the most liked investment alternatives for common man.

It is worth mentioning that a part of success of ETF, as investment product, goes to John Bogle. He is the founder and CEO of The Vanguard Group. He is one of those pioneers who were against of active investing. John C Bogle promoted ETF as the best financial product for a common man.

ETF is nearly two decades old investment option. This long running time-span speaks loads of its inherent advantages. If there is one win-win option for both providers and investors, it is ETF.

Experts suggest ETF’s for common man because of its low cost. The cost of managing an ETF is bare minimum. When cost is low for a fund, the chances to make higher returns are also enhanced.

In India, there are not many varieties of ETF. If I get more variety of ETF’s, probably I will buy shares only indirectly through ETF’s.

For the moment, India has ETF for Banking Stocks, Index Tracking, Gold and Infrastructure fund.

It is very surprising why ETF’s is not as successful in India. But ETF being the kind of product it is, its success is not far.

Now majority of ETF’s are focusing on gold and index. Soon we may have more sector focused ETF’s. Nevertheless, index tracking ETF’s are world’s favorite and the same is available in India.

Dominance of gold is clearly seen in ETF’s. With increased awareness about the advantages of ETF, there is not doubt that ETF’s will dominate the investment market in future.

Why ETF Investment is Good

I am personally a passive investors. I know there are investors who think that involved investing is best when it comes to equity. But I find my own comfort in passive investing. The theory of ETF matches with the concept of passive investing.

We know that ETF’s main advantage is its low cost. But why ETF’s are cheaper compared to other mutual fund family? This is because the way ETF portfolio is managed, in a passive way!

ETF portfolio is not managed in the same way as other diversified mutual funds. Neither there is dedicated, highly paid, fund managers required to manage ETF portfolio. Instead, the portfolio composition has a direct resemblance to the market index or gold prices etc.

But what we are talking about here is looks more like index linked mutual funds. So, what is the difference between index fund and index linked ETF?

Lets see what makes ETF even more unique than index funds. In terms of goal, ETF and index funds are identical. But the way you buy & sell them makes them different.

This is where ETF takes big leap over index funds. If you need to buy an index fund now, you need to call your bank and ask them to buy few units for you. Then, they will send their agent with a big KYC form that you need to fill and sign. Even if you are buying index funds online, downloading and filling forms is a formal procedure.

To buy ETF units one need not face all this formalities. Open an online trading account and buy/sell ETF units just like stocks.

But stocks are risky, ETF are equally risky? ETF are like stocks?

ETF’s are like stocks but with a more refined risk profile. ETF represents best hybrid of stocks and mutual funds.

TYPES of ETF currently operations in Indian Stock market in 2017

EQUITY ETF in India

Equity ETF are the most popular form of ETF that is currently being traded in Indian stock market. Investors like me love equity ETF as they provide us passive investing opportunity. Equity ETF generally follow an index. ETF maintains the same proportion of stocks as they are weighted in the underlying index. Some common underlying index that ETF’s follow are as follows:

  • Nifty 50 Index
  • Nifty 100
  • Nifty Bank
  • Nifty CPSE (Central Public Sector Enterprises like ONGC, Coal India, GAIL etc).
  • Nifty Infrastructure
  • Nifty Mid Cap 100
  • Nifty Next 50
  • S&P BSE Sensex
  • Nifty50 Value 20 Index
  • Nifty50 Shariah Index

As equity ETF duplicates the underlying index’s performance, hence equity ETF is considered most transparent. This also result in very low expense ratio of equity ETF’s compared to the mutual funds.

Gold ETF

In gold ETF, investors can buy non-physical gold like stocks. Buying gold ETF is like buying physical gold online from comfort of home.

Like equity ETF, gold ETFs too do not need active management. This fund can also be managed passively as their price is based on gold prices. Gold ETF invest in gold bullions directly.

As there is no physical gold involved here, over head of maintaining physical gold is completely eliminated.

Some of the famous gold ETF currently being traded in Indian stock market are as below:

  • Axis Gold ETF
  • Birla Sun Life Gold ETF
  • Canara Robeco Gold ETF
  • Goldman Sachs Gold Exchange Traded Scheme
  • HDFC Gold Exchange Traded Fund
  • ICICI Prudential Gold Exchange Traded Fund
  • IDBI Gold ETF
  • Kotak Gold Exchange Traded Fund
  • Quantum Gold Fund (an ETF)
  • Reliance Gold Exchange Traded Fund
  • Religare Gold Exchange Traded Fund
  • SBI Gold Exchange Traded Scheme
  • UTI GOLD Exchange Traded Fund

DEBT ETF

Debt linked ETF invest in securities that generates fixed income. This is the reason why debt ETFs yields consistent by low returns.

Unlike stocks, buying a debt linked investment product in India is not easy. As far as debt linked investment is concerned, common people know only bank deposits. But where one can buy bonds? Where one can buy G-Sec? etc. May be trained, pro-investors has access to such investment products. But where a common man can source them? What is the procedure? The answer are not encouraging.

But with advent of Debt ETF, even common men can now include all debt instruments in their investment portfolio. The best part of Debt ETF is, one can buy it online from comfort of home.

Like Equity ETF & Gold ETF, Debt ETF too does not need active fund management. They too become a good passive investing instrument, hence though a debt product, has very low expense ratio.

Few famous DEBT ETF currently being traded in Indian stock market are as below:

  • LIC Nomura MF G-Sec Long Term ETF – Reg – Growth (tracking underlying index: Nifty 8-13 yr G-Sec Index)
  • GS Liquid Exchange Traded Scheme (tracking underlying index: Government securities)

ETF Goes International Too

International ETF allow Indian investors to have exposure in the overseas stock market.

Generally international ETF track international index like NASDAQ (Index in USA), Hang Seng (Index of Singapore) etc.

Two famous international ETF currently operational in India are as follows:

  • GS Hang Seng BeES (Underlying index: HangSeng)
  • MOSt Shares NASDAQ 100 (Underlying index: Nasdaq 100)

(ETF)Exchange Traded Funds India 2017

Here are some ETF which were traded in the year 2017. Check them out and analyze it.

SLName of ETFMarket Price (Rs.)Asset Size (Rs.Cr.)NAV (Rs./Unit)3Y Return (%)
1SBI – ETF Nifty 5089.258,633.2989.03
2SBI – ETF Sensex297.002,485.85299.0614.10
3GS CPSE ETF24.762,228.2224.92
4GS Gold BeES2,785.001,775.202,850.721.60
5Kotak Banking ETF1,561.64199.86
6R*Shares Gold ETF2,741.001,365.382,755.761.20
7GS Liquid BeES1,000.001,176.811,000.00
8GS Nifty BeES890.52963.27894.7114.40
9SBI – ETF Gold2,795.00959.352,921.231.60
10GS Bank BeES1,971.00723.341,991.8324.40
11ICICI Prudential Nifty iWIN ETF88.91583.6188.9915.60
12HDFC Gold Exchange Traded Fund2,859.00574.762,900.071.40
13Kotak Gold ETF278.00499.15284.181.40
14Kotak Nifty ETF884.00472.91886.2215.80
15UTI Gold Exchange Traded Fund2,785.00469.652,855.751.50
16R*Shares Banking ETF2,128.10384.822,145.6225.50
17SBI – ETF Nifty Bank89.25277.81199.88
18UTI Nifty Exchange Traded Fund888.60230.86891.75
19Axis Gold ETF2,790.00226.772,899.181.40
20Birla Sun Life Nifty ETF93.45180.7392.4315.30
21Kotak PSU Bank ETF333.00151.48332.2716.30
22ICICI Pru Gold iWIN ETF94.09122.93294.24-52.90
23HDFC Nifty ETF884.26114.18885.61
24GS Junior BeES237.85108.76238.6826.90
25IDBI Gold Exchange Traded Fund2,840.0593.062,980.951.60
26Birla Sun Life Gold ETF (G)2,895.0081.322,978.601.30
27Can Gold Exchange Traded Fund2,895.0075.102,953.121.10
28LIC NOMURA G-Sec LTE Fund – RP (G)16.3074.4216.27
29Quantum Gold Fund1,389.9564.001,419.071.50
30Motilal MOSt Shares NASDAQ 100 ETF311.6062.47321.9417.50
31Motilal MOSt Shares Midcap 100 ETF17.5040.5916.6730.90
32GS PSU Bank BeES360.0033.14360.9514.70
33Motilal Oswal MOSt Shares Gold ETF*N.T29.662,529.56-4.20
34ICICI Prudential CNX 100 iWIN ETF94.0929.5694.0216.90
35R*Shares Nifty ETF90.8626.6691.18
36HDFC Sensex ETF2,911.2024.182,874.43
37Motilal MOSt Shares M50 ETF83.0022.4784.5914.60
38GS Infra BeES291.9016.95290.569.70
39R*shares Consumption ETF40.7516.5340.91
40UTI Sensex Exchange Traded Fund285.4515.26287.48
41R*Shares Dividend ETF22.8714.3122.94
42Kotak Sensex ETF290.0011.45290.8514.00
43Edelweiss ETS – Nifty (Nifty EES)*N.T11.099,023.15

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Why ETF’s are more popular in India

It is true that Indian people love stocks and traditional mutual funds more than ETF. As a matter of fact, in all developing economies, ETFs are not as popular.

But there can be another reason which makes ETF less popular in countries like India. ETFs are financial products that tracks its underlying indices. Like India, most ETFs track SENSEX or NIFTY. What does this mean?

When a financial product tracks an index, it means its price can rise or fall only as much as the index rise or fall. It means, people can generate returns only average returns offered by indices.

In countries like India, stock market is not as mature like that of USA, Europe, Australia etc. It means that, if one invests intelligently, beating the market is comparatively easier. This is one reason why mutual fund companies prefer launch of traditional mutual funds more than an ETF.

You will mark this difference by comparing at Asset Under Management of a top mutual fund and a top ETF.

In countries like USA, markets have become overvalued. Those stock markets are dominated by global giants like Apple, Google, Microsoft, Shell, GM, P&G, Facebook, EXXON, Berkshire Hathaway etc.

These are all matured companies, which are liked not only in USA but across the world. No points of guessing why these stocks always trade at overvalued price levels. When underlying stocks trade at overvalued price levels, linked index (like NASDAQ) will also become overvalued.

In such a matured and overvalued market, beating market for fund managers is a herculean task. Hence financial products like ETFs flourish in such markets.

In India, ETF has become more famous because of gold price linked ETF. There are no similar product in traditional mutual fund basket which tracks gold price.

I hope, in times to come, when Indian stock market matures further, like gold ETF, other ETF products will also gain momentum in India.

[P.Note: These days with advent of web-portals like fundsindia.com etc, buying mutual funds has become very easy]

Upcoming ETF’s Which Are Going To Be Launched in India

  • Large Cap ETF’s (consisting of large cap shares)
  • Mid Cap ETF’s (consisting of mid cap shares)
  • Small Cap ETF’s (consisting of small cap shares)
  • Growth ETF’s (consisting of growth stocks)
  • Value ETF’s (consisting of value stocks)
  • Index Linked ETF tracking major indices of world
  • Fixed Income ETF’s
  • ETF tracking real estate sector
  • Currency tracking ETF’s
  • Commodity tracking ETF’s

Index funds and ETFs are perfect example for passive investing. It is true that passive investing may not be as lucrative as actively managed investments, but passive style has its own advantages.

Primarily passive concepts suits personalities who like to build long-term wealth rather than making quick money.

There are ETF’s in America, which are managed by active investors. These are those ETF’s which is able to generate returns which even beat their underlying index. I wish that actively managed ETF are quickly launched in India.

If are well organised and have a systematic approach towards life, then ETF is for you. Like people invest in mutual funds on SIP basis, one can pick ETF as well.