Exchange Traded Funds (ETF)

ETFs, referred to as Exchange Traded Funds, are investment funds that hold specific assets, like gold (Gold ETFs), or a collection of assets, like NIFTY 50 stocks. 
You can buy or sell ETF funds at any time on the exchange. They track market indices (passive funds), which means their price fluctuates based on the index’s performance. 
ETFs have a lower expense ratio and let you buy units based on your budget, offering an affordable investment option. 

Yes, ETFs are traded in India. You can explore the top 15 ETF funds in India for diverse exchange-traded investment options.

• Fund providers create ETFs - They pool money from many investors to build a diverse portfolio mirroring a specific index or sector. 
• Listing - ETF funds are listed on stock exchanges. The value of an ETF fund share is closely tied to the worth of its underlying assets.
• Investing or Trading - Investors can buy or sell ETFs on the exchange throughout the trading day.
• Gaining a stake in the ETF - Fund providers offer a stake in the ETF to the investor, not its underlying assets.
• Returns - Investors earn returns based on the ETF’s performance. It is the gain or loss based on the performance of the underlying asset.

• When ETFs NAV are Calculated

The ETF Net Asset Value (NAV) is calculated daily and officially determined by using the closing prices of its underlying securities. 

• Formula for NAV

NAV for Exchange Traded Funds = Total market value of assets-liabilities/Total number of outstanding shares

• Example

If an ETF has a total market value of ₹50 crore, liabilities of ₹5 crore, and 2 crore outstanding shares, the Net Asset Value (NAV) calculation would be:
NAV = (₹50,00,00,000 - ₹5,00,00,000)/2,00,00,000= ₹22.5
This means the NAV per share for the ETF is ₹22.5. The daily NAV calculation helps investors in India gauge the per-unit value of the ETF's holdings. It provides a snapshot of its net worth based on the closing prices of underlying securities.

1. Equity ETFs - Equity ETFs invest in stocks that track a specific index. It offers a diversified portfolio of stocks for investors seeking long-term returns with a lower expense ratio.
2. Debt ETFs - Debt ETFs, also called Bond ETFs, provide access to a variety of bonds, including municipal, corporate, and governmental bonds. It is suitable for investors seeking fixed-income securities with equity market flexibility.
3. Global ETFs - Global ETFs track international indices, such as the NASDAQ. If you want to diversify risk across different economies and not just rely on the domestic market, you can opt for Global ETFs.
4. Commodity ETFs - Commodity ETFs expose inventors to commodities, such as gold and silver. They allow you to capitalise on the price movements without directly trading futures or options contracts. 
5. Index ETFs - Index ETFs are created to track specific indices, such as the BSE SENSEX and NIFTY 50. It is suitable for investors looking forward to a broad range of stocks for long-term returns.
6. Sector ETFs - Sector ETFs concentrate on certain market segments like healthcare, technology, or energy. Investors who want to target specific sectors with high potential for growth can invest in Sector ETFs.
7. Inverse ETFs - Inverse ETFs are created to provide returns based on the opposite of a specific index or sector. It allows the investors to hedge their portfolios and capitalise on market declines. 
8. Leveraged ETFs - Leveraged ETFs use debt instruments or financial derivatives to boost the returns of an index. While they have a potential for higher returns, they come with increased risk and are suitable for short-term trading. 

ETFs incur an Operating Expense Ratio (OER). It is an annual fee charged by the fund to cover portfolio management and administration costs. 

In addition, expenses for ETFs can include trading costs, such as brokerage commissions and bid/ask spreads.

• Intraday Trading - Buying and selling ETFs within the same day during trading hours to profit from possible fluctuations.
• Swing Trading - Investing to benefit from short-term price swings in ETFs, typically seen over a few days or weeks. 
• Sector Rotation - Investing in sectors that are performing well or have the potential to generate higher returns.
• Short-Selling - Selling ETFs you don’t own (borrow and sell) at the current price, expecting the price to drop, and buying them later at a lower price.
•  Hedging - Investing in Exchange Traded Funds that move opposite to your existing portfolio to protect it from a downturn. 
   

Gains from ETFs are taxed based on the holding period and type of ETF (equity, debt, commodity, etc.). 
If the income is in the form of a dividend, it is added to your taxable income and taxed per the income tax slab rate. 

Holding Period

Gains from ETFs held for:

• Less than 12 months - Short-term capital gains
• More than 12 months - Long-term capital gains

Type of ETF Funds

• For Debt ETFs - Both short-term and long-term capital gains are taxed per the specific income tax slab rates.
• For Equity ETFs - Short-term capital gains are taxed at 20%, and long-term gains are taxed at 12.5% without indexation.
• For Gold ETFs and other non-equity ETFs - Short-term capital gains are taxed per the income tax slab rate, and long-term gains are taxed at 12.5% without indexation.

Yes, you can buy or sell ETFs just like individual stocks during exchange trading hours. You can log in to your 5Paisa account and execute the buy and sell actions. 

ETFs are traded on a stock exchange throughout the market hours, similar to stocks. While stocks refer to buying shares of a company, ETFs hold a specific asset or a mix of assets similar to a mutual fund. 

ETFs and Mutual Funds differ in the way they are managed. Mutual funds are actively managed and analysed by fund managers to take actions to outperform the index. 

On the other hand, ETFs are passively managed, meaning they aim to reflect the index’s performance rather than trying to outperform it. 

Also, mutual funds are priced based on the value of the underlying asset at the end of the trading day, while ETFs are priced continuously throughout market hours. 

Index funds function similarly to mutual funds. You don’t essentially need a demat account to invest in index funds and mutual funds. In contrast, ETFs are available and traded only on stock exchanges, requiring a demat account for investment. 
 

• Market Risk - ETFs invest in a wide range of asset classes. Any factor that affects these assets, such as economic conditions, political developments and overall market fluctuations, can directly affect the ETF’s value. 
• Tracking Error - ETFs track a market index and aim to mirror its performance. However, due to the tracking strategies and transaction costs involved, they may not exactly replicate the index’s performance.
• Liquidity Risk - Some ETFs may have a wide bid-ask spread and low trading volume. This will create a challenge when you want to buy or sell ETF Funds at a desired price and cause a delay in the trade execution.
   

• Investment Goals: Clearly define your investment goals and their timelines, such as short-term gains, long-term capital appreciation, or regular income.
• Risk Tolerance: Evaluate your risk tolerance level and choose the best Exchange Traded Funds in India for your portfolio.
• Expense Ratio: Consider the expense ratio, which is the fund's total annual operating expenses (including management fees, administrative costs, trading costs, etc.) as a percentage of its assets.
• Diversification: Diversify your portfolio by picking ETFs to invest in from different asset classes, like stocks, bonds, real estate, and commodities.
• Liquidity - Ensure the ETF Funds have a higher trading volume to let you trade actively and let you buy or sell when intended.
• Research ETF Trading: Research the ETFs thoroughly before investing, such as analysing the strategies, trends, past performance, and risk factors associated with them.
• Tax Implications - Review the tax implications that apply to the specific type of ETF investment and the holding period.
   

• Assess Underlying Stocks - Identify the sector or asset class the ETF focuses on, such as technology, healthcare, or bonds. 
• ETF Research and Analysis - Examine the ETF's holdings and weightings within that sector to understand its diversification.
• Review Performance - Evaluate the historical performance of the sector or asset class to gauge potential risks and returns. 
• Determine Expense Ratio - Find the Operating Expense Ratio (OER). A reduced fee for your ETF investments means higher returns during the long term. 
• Examine Liquidity - Consider the liquidity of the ETF, ensuring ease of buying or selling shares. 
• Determine Tracking Error - Look at the tracking error, measuring how closely the ETF mirrors its benchmark index.
• Review Market Conditions - Analyse the overall market conditions and economic factors influencing the chosen sector or asset class. 
   

• Assess your Financial Condition and Goals - A careful assessment of your investment goals, risk tolerance, and time horizon is the first important step.
• Find ETFs based on your Goals - Find ETFs aligning with specific objectives such as long-term growth, income generation, or capital preservation. 
• Evaluate Factors - Consider factors like the ETF's underlying holdings, expense ratio, and performance history in your decision-making.
• Diversify your Portfolio - Diversification is key. Include ETFs spanning various asset classes like stocks, bonds, and commodities to mitigate risk. 
• Seek Expert Guidance -  Financial advisors can provide valuable insights to find the best ETF funds in India that align with your investment goals.  
   

• Trading on the Secondary Market - Investors can buy or sell ETFs on the secondary market to gain liquidity. 
• In-kind Creation/ Redemption Process - Certain authorised participants can exchange the collection of underlying assets with the fund issuer to create or redeem ETF units.
   

No, after Budget 2024, the indexation benefit for long-term capital gains (LTCG) was removed for ETFs. LTCG is now taxed at 12.5% without indexation. Short-term capital gains tax (STCG) on equity ETFs is taxed at 20%, while non-equity ETFs follow the investor’s income tax slab.