Invest in Exchange Traded Funds (ETFs) in India

An ETF is listed on a stock exchange and trades throughout market hours, similar to a share. Each ETF is designed around a stated objective, such as tracking a market index, sector, commodity, bond portfolio or international market. The traded price is determined by market demand and supply and may be above or below the ETF’s net asset value. Investors should compare the benchmark, expense ratio, tracking error, liquidity and bid-ask spread before placing an order.

How Do ETFs Work?

An ETF provider creates a portfolio based on the fund’s stated benchmark or investment objective. ETF units are listed on a stock exchange, where investors buy and sell them through a trading account. The market price changes during the trading day based on demand and supply. Because of expenses, trading costs and tracking difference, an ETF’s return may not exactly match the return of its benchmark.

Here’s a simplified overview of how ETFs work:

1. The fund house defines the ETF’s benchmark or investment objective and creates the underlying portfolio.
2. The ETF units are listed on a stock exchange and can be purchased through a Demat and trading account.
3. Investors buy and sell ETF units during market hours at the available market price or through a limit order.

Types of ETFs in India

ETFs in India provide exposure to different indices, sectors, commodities, debt instruments and international markets. The objective, portfolio, risks, costs and tax treatment vary by ETF category.

1. Gold ETFs: Gold ETFs seek to track the domestic price of gold, subject to fund expenses and tracking difference. They provide gold exposure without requiring investors to store physical gold.
2. Silver ETFs: Silver ETFs seek to track domestic silver prices, subject to fund expenses and tracking difference. Their value can be affected by changes in silver prices and market liquidity.
3. Debt ETFs: Debt ETFs invest in a portfolio of fixed-income securities such as government securities, treasury bills or corporate bonds, depending on the scheme objective. Their risks may include interest-rate, credit and liquidity risk.
4. Sectoral and Thematic ETFs: These ETFs track companies from a specific sector or investment theme. They may have higher concentration risk than broad-market index ETFs.
5. Liquid ETFs: Liquid ETFs generally invest in short-term money-market instruments and are designed for short-term cash management. Investors should review the scheme objective, liquidity, costs and applicable risks.
6. Global ETFs: Global ETFs provide exposure to securities or indices outside India. Their returns may be affected by overseas market movements, currency fluctuations, tracking difference, liquidity and applicable investment restrictions.
7. Index ETFs: Index ETFs seek to track a specified market index, such as a broad-market, market-cap or strategy index. Investors should compare tracking error, expense ratio, liquidity and bid-ask spread.

The fund manager holds the securities in the same proportions and makes necessary adjustments to the holdings so as to reflect changes in the index or theme, therefore closely matching the performance of the index or the theme. Global ETFs allow you to diversify your investment opportunities by taking it beyond the local market, to worldwide. The good part of global ETFs is that they are cost-effective as they come with lower fees in comparison to actively managed funds, thus allowing you to keep a greater share of your gains. These funds provide smooth liquidity, making it simple to buy and sell throughout business hours. Since Global ETFs usually follow well-known international indexes, transparency is advantageous since it gives investors a clear picture of their holdings to help them make well-informed decisions. By exposing your portfolio to a variety of currencies and lowering reliance on the performance of a single one, they can also assist in reducing currency risk. In conclusion, Global ETF funds offer a practical and economical means of managing and diversifying your investments globally.

Benefits of  Investing in ETFs

• Flexibility in Trading: Unlike traditional mutual funds, which are only traded at the end of the trading day, ETFs allow investors to buy and sell shares at any time during market hours.
• Transparency of Holdings: Most ETFs are obligated to disclose their holdings on a daily basis, providing investors with greater transparency regarding their investments.
• Tax Efficiency: ETFs tend to be more tax-efficient compared to actively managed mutual funds, as they typically generate fewer capital gain distributions, which can benefit investors.
• Diverse Order Options: ETFs are traded similarly to stocks. Investors can utilise various order types, such as limit orders and stop-loss orders, which are not available for mutual funds.
• Ease of Diversification: ETFs make it easy to diversify your portfolio. By buying one ETF, you gain exposure to a collection of securities. This spreads your risk across different assets and sectors.
• Liquidity: ETFs are known for their high liquidity. They are traded actively during market hours. High liquidity can lead to narrower bid-ask spreads. This may reduce transaction costs for investors.
• Potential for Dividend Income: Many ETFs pay dividends from the assets they hold. This can provide an added income stream. It is ideal for investors who seek income-generating options.
• Simplified Management: ETFs are passively managed. They typically follow an index and require less monitoring. It can simplify investment management.

Why Invest in ETFs?

ETFs can help investors obtain diversified exposure through a single exchange-traded instrument. They may suit investors who understand the ETF’s benchmark, costs, tracking difference, liquidity and risks. An ETF should be selected according to the investor’s financial objective, risk profile and investment horizon; returns are not guaranteed.

How to Invest in ETFs Online

Before placing an order, identify the ETF category that matches your investment objective and risk profile. Compare the benchmark, expense ratio, tracking error, assets under management, trading volume, bid-ask spread and historical performance. Past performance does not guarantee future returns.

• Step 1: Log in to HDFC SKY — Access your HDFC SKY account through the app or web trading platform.
• Step 2: Search for the ETF — Enter the ETF name or trading symbol and open its quote page.
• Step 3: Review the ETF — Check the benchmark, market price, expense ratio, tracking error, liquidity and bid-ask spread.
• Step 4: Enter the order details — Select buy or sell, enter the quantity and choose a market or limit order.
• Step 5: Review and place the order — Verify the ETF name, quantity, order type, price and estimated charges before submitting the order.

How to Choose an ETF

Conclusion

Before investing in an ETF, review its investment objective, benchmark, portfolio, expense ratio, tracking error, liquidity, bid-ask spread, risks and tax treatment. Read the latest scheme information document, key information memorandum and fund factsheet. ETF returns are market-linked and are not guaranteed.