Best ETF - Exchange Traded Funds

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About Exchange Traded Funds

ETFs (Exchange Traded Funds) are a popular investment vehicle in India. ETFs are traded on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

The trading process for ETFs in India is similar to that for stocks. Investors can buy or sell ETFs on the stock exchange through a stockbroker, just like buying or selling stocks. The ETFs are listed on the exchange, and their prices fluctuate throughout the trading day based on market demand and supply.

To buy an ETF in India, an investor needs to have a demat account. If you don’t have one, you can easily open it through Angel One.

Once you have a demat and trading account with Angel One, you can place an order to buy or sell an ETF through your stockbroker’s online trading platform or by calling your broker. The order will be executed based on the prevailing market price of the ETF.

How Do ETFs Work?

Exchange-traded Funds differ from regular mutual funds in that they trade similarly to common stocks on stock exchanges. This means that the price of an ETF fluctuates throughout the trading day, just like any other stock, as it is constantly bought and sold on the exchange. The value of an ETF is closely tied to the net asset value of the underlying stocks it represents.

The underlying assets of an ETF are typically owned by the fund provider. The provider then creates a fund to mimic the performance of these assets and offers shares in this fund to investors. It’s important to note that while investors own shares of an ETF, they do not have ownership rights over the actual assets held by the fund.

In the case of ETFs that track a specific stock index, investors may receive periodic dividend payments or reinvestments corresponding to the constituent companies in that index.

Here’s a simplified breakdown of how ETFs function:

  1. An ETF provider assesses a pool of assets, such as stocks, bonds, commodities, or currencies, and constructs a basket of these assets, each with its own ticker symbol.
  2. Investors can purchase shares of this asset basket, much like they would buy shares of a company’s stock.
  3. Similar to individual stocks, ETFs are traded on a stock exchange, and investors can buy and sell them throughout the trading day.

Features of ETFs

ETF funds in India are managed by Asset Management Companies (AMCs) and offer investors exposure to a diversified portfolio. Here are some features of ETF Funds in India:

  1. Diversification: ETFs invest in a basket of securities, providing investors with diversification across a range of stocks, bonds or commodities. This helps to reduce the overall risk of the investment portfolio.
  2. Liquidity: ETFs are traded on stock exchanges, which means they can be bought and sold anytime during market hours. This provides investors with the flexibility to enter or exit the investment as per their requirements.
  3. Transparency: ETF funds provide transparency in terms of the underlying holdings of the fund. Investors can easily access information about the stocks, bonds, or commodities that the ETF invests in.
  4. Cost-effective: ETFs have lower management fees compared to actively managed funds. This makes them a cost-effective option for investors.
  5. Tax-efficient: ETFs are structured in a way that makes them more tax-efficient than mutual funds. This is because ETFs do not have to sell securities to meet investor redemptions, which can result in capital gains tax.
  6. Easy to trade: ETFs can be traded like stocks on stock exchanges, making it easy for investors to buy and sell them. Investors can place orders for ETFs through their brokers just like they do for shares.

Advantages of Investing in ETFs

Here are some advantages of investing in ETF funds in India:

  1. Diversification: ETFs invest in a diversified basket of securities, which can help to spread out risk across different sectors and companies. This means that investors can gain exposure to multiple stocks with a single investment, reducing the risks of putting all their money in a single stock.
  2. Lower costs: ETFs are often cheaper to invest in than mutual funds, as they have lower expense ratios. This means that investors can benefit from lower management fees and save on costs associated with buying and selling individual securities.
  3. Transparency: ETFs are listed on stock exchanges, which means that their prices are transparent, and investors can easily track the value of their investments. This makes it easier for investors to buy and sell ETFs on the open market.
  4. Flexibility: ETFs can be traded like stocks, which means that investors can buy and sell them throughout the day. This gives investors greater flexibility to react to market fluctuations and adjust their portfolios as needed.
  5. Tax efficiency: ETFs are generally more tax-efficient than mutual funds. They help investors to save on taxes over the long term.

Risks Involved in ETFs

Like any other investment, ETFs also involve risks, and investors must consider them before investing. Here are some of the key risks involved in ETF funds in India:

  1. Market Risk: ETFs invest in the underlying securities or assets, and any fluctuation in their prices can impact the ETF’s value. Market risk affects all types of ETFs, whether equity-oriented or non-equity-oriented.
  2. Tracking Error Risk: Some ETFs aim to track the performance of an underlying index or benchmark. However, due to various factors such as tracking error, expenses, and liquidity, there can be a deviation between the ETF’s performance and the underlying index’s performance.
  3. Liquidity Risk: If the underlying securities or assets of an ETF do not trade frequently, it can affect the ETF’s liquidity. In such a scenario, the ETF may not be able to track its benchmark accurately or may not be able to trade at the market price.

Investors should evaluate the risks and assess their risk tolerance before investing in ETFs. It is also essential to diversify the portfolio and invest in a mix of ETFs to manage risks.

Factors To Consider Before Investing in Exchange Traded Funds

When considering investments in Exchange-Traded Funds (ETFs), several key factors warrant attention:

  1. Underlying Index Selection: Begin by choosing the market of interest and deciding between investing in the overall benchmark index or a specific sectoral index.
  2. Total Expense Ratio (TER): ETFs charge an annual fee, typically a small percentage of assets, to cover expenses. Different funds tracking the same index may feature varying TERs.
  3. Tracking Error: It’s essential for an ETF to closely mirror its benchmark index. Traditional tracking error measures the deviation in returns between the ETF and the index. Lower tracking error indicates better performance alignment.
  4. Liquidity: Liquidity is pivotal for ETFs, affecting bid-ask spreads. High-liquidity ETFs usually feature narrower spreads, making them more desirable for trading.
  5. Assets Under Management (AUM): AUM is the product of shares outstanding and market price per share. It fluctuates with underlying security values and unit purchases/redemptions. Higher AUM often correlates with increased liquidity, making it a useful liquidity proxy.

Who Should Invest in ETFs?

Exchange-traded funds (ETFs) in India are investment products that allow investors to gain exposure to a basket of securities that track the performance of an underlying index, commodity, or a specific sector in India. Here are some types of investors who could consider investing in ETFs:

  1. Beginner investors: ETFs are a great way for beginners to start investing in the stock market. They offer the advantage of diversification and are easy to buy and sell like stocks.
  2. Long-term investors: If you’re a long-term investor who wants to build wealth over time, ETFs are a great option. They offer exposure to a diversified portfolio of stocks and bonds that can help you achieve your long-term investment goals.
  3. Passive investors: If you want to invest in the stock market without having to pick individual stocks, you can benefit from ETFs. These funds typically track a benchmark index, making them a low-cost way to gain exposure to the market.
  4. Risk-averse investors: If you’re a risk-averse investor, ETFs can be a good option as they offer diversification and are less risky than investing in individual stocks.

Taxability of ETFs

The tax treatment for ETFs differs based on whether they are equity-oriented or non-equity-oriented. Equity-oriented ETFs, such as index ETFs and equity ETFs, are subject to capital gains tax. If the units are held for less than 365 days, capital gains are taxed at 15% plus a 4% CESS, while units held for more than a year are taxed at 10% without indexation benefits. Long-term capital gains up to ₹1 lakh are exempt from tax.

On the other hand, non-equity-oriented ETFs, such as gold and international ETFs, are taxed differently. Short-term capital gains on these ETFs, held for less than 36 months, are taxed at the investor’s applicable income tax slab rate. Meanwhile, long-term capital gains on these ETFs, held for over a year, are taxed at 20% after applying for indexation benefits.

Dividend taxation – The dividend income is added to the investor’s taxable income and taxed as per their slab. There is also a 10% TDS charged by the mutual fund house on a dividend amount exceeding ₹5,000 in a financial year.

How To Invest in ETFs?

Investing in Exchange Traded Funds (ETFs) through your Angel One account is a streamlined process. Here’s how to do it:

Step 1: Start by logging in to your Angel One account using your registered mobile number. Verify the OTP and input your MPIN.

Important: If you don’t possess a Demat account with Angel One, you can swiftly open one by completing the KYC formalities and submitting the required documents.

Step 2: Next, select the most appropriate fund based on your financial objectives and risk tolerance. You can explore each fund within the mutual fund section on the Angel One app. Consider these factors:

  • Search for the specific fund you intend to invest in or seek recommendations from Angel One’s fund offerings across various categories.
  • Analyse the fund’s historical performance, tax implications, constituent sectors, and stocks.
  • Utilise the provided calculator to estimate potential returns.
  • Assess the fund’s risk level and align it with your risk appetite.
  • Take note of the fund’s ratings from respected agencies, typically rated on a scale of 1 to 5.
  • Factor in the fund’s expense ratio to gauge the cost associated with your investment.

Step 3: Once you’ve made your fund selection, access your Angel One account, proceed to the Mutual Funds section, and locate your chosen fund. Given that this could be a long-term investment, exercise care when making your choice. During this phase, consider the following:

  • Decide whether you want to invest a lump sum or opt for a monthly SIP (Systematic Investment Plan).
  • Specify your desired investment amount and choose your preferred payment method.
  • If you’ve opted for the SIP route, you can establish a mandate for effortless future contributions after placing your initial order.

Top 5 ETFs in India

Fund Name AUM

(in ₹ crore)

Minimum Investment (in ₹) 3-yr Returns (%) 5-yr Return (%)
Motilal Oswal NASDAQ 100 ETF 5,225.00 5,000 14.71 19.52
Axis Gold ETF 822.00 5,000 10.81 12.63
Nippon ETF Consumption 38.00 5,000 13.44 9.57
Nippon India ETF Nifty 8-13 yr G-Sec Long Term Gilt 1,284.10 2,50,000 3.79 6.67
Nippon ETF Hang Seng BeES 174.95 2,500 -1.5 -1.9

The above-mentioned top funds are for informational purposes only and are not recommendations. The funds are based on a 5-year return, which is subject to change frequently. Check out real-time data on Angel One.

Motilal Oswal NASDAQ 100 ETF

This scheme seeks investment return that corresponds to the performance of the NASDAQ 100 Index, subject to tracking error. The current assets under management (AUM) is ₹5,225 crore and the expense ratio is 0.58%.

Axis Gold ETF

Found in 2010 the scheme seeks to generate returns that are aligned with the performance of gold. The current assets under management (AUM) is ₹822 crore and the expense ratio is 0.53%.

Nippon ETF Consumption

The scheme seeks to provide investment returns that, before expenses, closely correspond to the total returns of securities as represented by the fund index. The current assets under management (AUM) is ₹38 crore and the expense ratio is 0.31%.

Nippon India ETF Nifty 8-13 yr G-Sec Long Term Gilt

With fund managers Pranay Sinha and Siddharth Deb, this fund was founded in 2016. The current assets under management (AUM) is ₹1,284 crore and the expense ratio is 0.10%.

Nippon ETF Hang Seng BeES

This investment scheme aims to achieve returns that closely track the total returns of the securities included in the Hang Seng Index of Hang Seng Data Services Limited. To achieve this, the scheme invests in the same securities and in the same proportion as they are represented in the Index before deducting any expenses. The current assets under management (AUM) is ₹174.95 crore and the expense ratio is 0.93%.

Mutual Funds Calculators

Exchange Traded Funds FAQs

What are Exchange Traded Funds in India?

ETFs or Exchange Traded Funds are mutual fund schemes that are listed and traded on stock exchanges like regular stocks.

How do Exchange Traded Funds work?

ETFs invest in a basket of securities that are representative of a particular index or sector. For example, an ETF that tracks the Nifty 50 index will invest in the 50 stocks that are part of the index in the same proportion as the index. The units of the ETF are listed on stock exchanges and can be bought and sold like stocks.

What is the ideal investment horizon for Exchange Traded Funds?

The ideal investment horizon for ETFs depends on the investment objective and the underlying assets of the ETF. Generally, ETFs are considered suitable for investors with a medium to long-term investment horizon of 3-5 years or more.

What are the advantages of investing in Exchange Traded Funds?

Some advantages of investing in ETF funds include diversification, low cost, and flexibility. 

  1. Diversification: ETFs provide exposure to a diversified portfolio of assets, which can help reduce risk.
  2. Lower costs: ETFs generally have lower expenses compared to mutual funds, making them a cost-effective investment option.
  3. Flexibility: ETFs can be bought and sold like individual stocks, making them a flexible investment option for investors.

What are some popular Exchange Traded Funds in India?

Some popular ETFs in India include Nifty 50 ETF, Gold ETF, Nifty Bank ETF, and Nifty Next 50 ETF. The ETF market in India is growing, and there are several ETFs available across different asset classes and sectors.