Exchange Traded Funds (ETFs) are a bundle of securities which are traded just like any other stock on the stock exchange. ETFs track an underlying index and replicate the performance of the index.
The ETFs are not bought and sold at the Net Asset Value (NAV ) like traditional mutual funds but are traded on the stock exchange at a market determined prices that are close to the NAV of the fund.
There are different types of ETFs available for investments such as Index ETF, Commodity ETF, International ETF and Liquid ETF.
These ETF will invest in commodities such as precious metals and futures. As of now, we only have Gold ETF.
An index fund main objective is to track the performance of a particular index.
These ETFs have an international index such as NASDAQ, HANG SENG as the underlying tracking instrument.
The ETF ensures that investors money earns interest even if it is held for short period of time.
Here are five main features of Exchange Traded Funds
1. Expenses compared to Mutual Funds
ETFs have lower expense ratio when compared to mutual funds. The features of the ETFs ensure that it does not need an expensive fund manager and there is no commission to be paid.
2. Capital gains
Individuals need to pay capital gains tax only when you actually make capital gains. Individual investing in Gold Exchange Traded Funds will attract short term capital gains as per the income tax slab. For Index ETFs, the short term capital gains on these instruments is at 15 per cent, while there is no capital gains tax in the long term.
3. Better Returns than Fixed Deposits
ETFs have better track record of returns when compared with bank fixed deposits. ETFs will not attract any tax if sold after one year, where as for bank fixed deposits TDS is applicable.
4. Easy Liquidity
Retail investors can consider investing in ETFs as they are traded on stock exchange and they offer flexibility & liquidity. Also, costs of distribution will be much lower as the reach is wider.
5. Portfolio Diversification
One can buy and sell funds through demat account as the broad market indices helps in diversification. Individuals can diversify their investment in different ETFs at low cost and protect them from short-term trading activity.
How to invest in ETFs In India?
Investor having demat account and a trading account with an online facility and can place order through broker after selecting the required ETF.