Exchange Traded Funds (ETFs) in India are investment funds traded on stock exchanges, much like individual stocks. They are designed to track and replicate the performance of specific indices, sectors, commodities, or assets. An ETF works like an index mutual fund but trades like a stock. It gives you diversification like a mutual fund but liquidity like a stock.
- Exchange Traded Funds Meaning
- ETF example
- Features Of ETF
- Advantages of ETF
- Disadvantages of ETF
- Difference Between ETF and Mutual Fund
- Best ETF To Buy In India
- ETF Returns
- How To Invest In ETF
- Exchange Traded Funds India – Quick Summary
- Exchange Traded Funds Meaning – FAQs
Exchange Traded Funds Meaning
Exchange-traded funds are investment funds that trade on a stock exchange, similar to regular shares. They are created to track the performance of a particular index, commodity, or asset class and replicate their returns. The primary feature of ETFs is their ability to be bought and sold like shares on a stock exchange during market hours, providing liquidity and flexibility.
For example, an ETF that tracks the Nifty50 index comprises the same 50 stocks in the same proportion. The fund’s performance then closely mimics that of the Nifty50 index. ETFs can also track sectors, commodities (like gold or oil), bonds, or a basket of assets.
An example of a popular ETF in India is the SBI-ETF Nifty 50. This ETF is designed to track the Nifty 50 index, representing about 66.8% of the free float market capitalization of the stocks listed on the NSE as of March 31, 2021.
Let’s say an investor purchased units of the SBI-ETF Nifty 50. The performance of this ETF would be linked to the Nifty 50 index. So, if the Nifty 50 index rose by 10%, the value of the SBI-ETF Nifty 50 would also increase by roughly the same percentage, minus expenses.
Features Of ETF
The primary feature of ETFs is their ability to be bought and sold like shares on a stock exchange during market hours, providing liquidity and flexibility.
Other salient features of ETFs include:
- They track a specific index, commodity, or asset class.
- They provide diversification as each ETF unit represents a portfolio of securities.
- Unlike mutual funds, ETFs have no minimum investment requirement.
Advantages of ETF
One of the major advantages of ETFs is their lower expense ratios compared to mutual funds due to their passive management style.
- Greater transparency: ETFs provide high transparency to their investors. They must disclose their portfolio holdings daily, giving investors a clear view of where their money is invested.
- Flexibility: ETFs offer significant trading flexibility. Unlike mutual funds, which can only be traded at the end of the trading day, ETFs can be bought and sold throughout the trading day, just like stocks. Additionally, investors can execute different orders, such as limit orders (buying/selling at a specific price) and stop loss orders (buying/selling when a certain price level is reached), allowing for strategic trading.
- Accessibility: ETFs allow investors to gain exposure to various sectors, market indices, commodities, or even geographical areas that might be difficult to access otherwise. This means an investor can diversify their portfolio or focus on specific sectors relatively easily.
- Income Generation through Dividends: Depending on the underlying assets, many ETFs may distribute dividends to investors. For instance, an ETF that tracks an index comprising dividend-paying companies will typically distribute the dividends received from those companies to its investors, thus providing an additional source of income.
Disadvantages of ETF
The main disadvantage of ETFs is their liquidity constraints, ETFs can be bought and sold at any time of the day, but some may not have many traders, making it harder to buy and sell them.
Here are some disadvantages of ETFs explained simply and understandably:
- Trading Costs: Every time you buy or sell an ETF, you may have to pay a brokerage commission. CNC Orders on ETFs are free at Alice Blue!
- Limited Exposure: Certain sectors or geographical areas might not have corresponding ETFs, limiting your ability to diversify your investments.
- Dividend Payment Timing: Although ETFs often distribute dividends to investors, the timing may not be as regular as with some mutual funds. This could impact income-focused investors.
Difference Between ETF and Mutual Fund
The primary difference between ETFs and mutual funds is that ETFs trade on an exchange like stocks, while mutual funds are bought and sold based on their net asset value (NAV) at the end of the trading day.
|Trading||Trade like stocks on an exchange||Bought/Sold at end-of-day NAV|
|Pricing||Prices can fluctuate throughout the day||Price is set once a day|
|Minimum Investment||No minimum investment requirement||Often have a minimum investment requirement|
|Management||Typically passively managed||Can be actively or passively managed|
|Fees||Generally lower expense ratios||Higher expense ratios due to active management|
|Transparency||Holdings disclosed daily||Holdings disclosed monthly or quarterly|
|Flexibility||Can be bought on margin and sold short||Cannot be bought on margin and sold short|
Best ETF To Buy In India
As of 2023, here are some of the top-performing ETFs in India:
- SBI-ETF Nifty 50:
- 1-Year Return: 23.82%
- 5-Year Return: 85.94%
- Expense Ratio: 0.07
SBI-ETF Nifty 50 is an ETF that tracks the Nifty 50 index. It has shown strong returns both over the past year and the past 5 years, with a relatively low expense ratio of 0.07%.
- UTI Nifty ETF:
- 1-Year Return: 24.18%
- 5-Year Return: 84.42%
- Expense Ratio: 0.07
UTI Nifty ETF is another ETF that mirrors the Nifty 50 index. It has provided robust returns over the last year and the past 5 years, with an expense ratio of 0.07%, making it an attractive option for investors seeking Nifty 50 exposure.
- ICICI Prudential Nifty ETF:
- 1-Year Return: 23.98%
- 5-Year Return: 90.93%
- Expense Ratio: 0.03
ICICI Prudential Nifty ETF is an NSE-traded fund that closely tracks the Nifty 50 index. It has demonstrated strong returns over both the last year and the past 5 years, with a particularly low expense ratio of 0.03%.
- Kotak Nifty50 ETF:
- 1-Year Return: 20.53%
- 5-Year Return: 90.32%
- Expense Ratio: 0.12
Kotak Nifty50 ETF is an ETF that aims to replicate the Nifty 50 index’s performance. While it has provided positive returns over the last year and 5 years, it has a slightly higher expense ratio of 0.12% compared to some other options.
- Aditya Birla Sun Life Nifty ETF:
- 1-Year Return: 20.99%
- 5-Year Return: 11.20%
- Expense Ratio: 0.05
Aditya Birla Sun Life Nifty ETF is an NSE-listed ETF that seeks to track the Nifty 50 index. It has delivered decent returns over the last year but has a relatively lower 5-year return compared to other Nifty ETFs, with an expense ratio of 0.05%.
ETF returns over one year, the UTI Nifty ETF showed the highest return at 24.18%, slightly outperforming the SBI-ETF Nifty 50 at 23.82% and ICICI Prudential Nifty ETF at 23.98%.
Here are the best ETFs to invest in 2023:
|ETF||1-Year Return||5-Year Return||Expense Ratio|
|SBI-ETF Nifty 50||23.82%||85.94%||0.07|
|UTI Nifty ETF||24.18%||84.42%||0.07|
|ICICI Prudential Nifty ETF||23.98%||90.93%||0.03|
|Kotak Nifty50 ETF||20.53%||90.32%||0.12|
|Aditya Birla Sun Life Nifty ETF||20.99%||11.20%||0.05|
How To Invest In ETF
Investing in ETFs in India is quite similar to investing in individual stocks. Here are the steps to invest in ETFs via Alice Blue:
- Open a Demat and trading account with Alice Blue. You must provide necessary documents like a PAN card, Aadhaar card, and proof of address.
- Complete the Know Your Customer (KYC) process.
- Log in to your Alice Blue account.
- Navigate to the market watch section and search for the ETF you want to invest in.
- Add the ETF to your market watchlist.
- Click on the Buy option, enter the quantity, and place the order.
Exchange Traded Funds India – Quick Summary
- ETFs in India are investment funds that trade on a stock exchange, providing investors with a way to invest in a diversified portfolio of assets in a single transaction.
- An ETF typically tracks an index, commodity, bond, or basket of assets.
- An example of an ETF in India includes the Nifty BeES, which mirrors the performance of the Nifty 50 index.
- Features of ETFs include liquidity, diversification, transparency, and cost-effectiveness.
- ETFs offer several advantages over mutual funds, including the ability to trade intraday, lower expense ratios, and increased transparency.
- Some of the top-performing ETFs in India include SBI-ETF Nifty 50, UTI Nifty ETF, and ICICI Prudential Nifty ETF.
- Investing in ETFs in India requires a Demat and trading account and can be done via brokerages like Alice Blue.
- Open your demat account with Alice Blue and start your investment journey.
Exchange Traded Funds Meaning – FAQs
What is meant by exchange-traded funds?
Exchange Traded Funds (ETFs) are like mutual funds traded on stock exchanges, much like individual stocks. They are designed to track the performance of specific indexes, commodities, or baskets of assets.
What are 4 benefits of ETFs?
- Diversification: ETFs provide exposure to a wide range of securities in one investment, helping to spread risk.
- Liquidity: ETFs can be bought and sold throughout the trading day at market prices.
- Lower Costs: ETFs typically have lower expense ratios compared to mutual funds.
- Transparency: ETFs disclose their holdings daily, letting investors know exactly what assets they own.
What are the top 5 ETFs to buy?
Here are the top 5 ETFs to invest in India:
|SBI-ETF Nifty 50|
|UTI Nifty ETF|
|ICICI Prudential Nifty ETF|
|Kotak Nifty50 ETF|
|Aditya Birla Sun Life Nifty ETF|
How can I buy an ETF in India?
To buy an ETF in India, you must have a Demat and trading account. When you open an account with a brokerage firm like Alice Blue, you will have access to exchange-traded funds (ETFs). It works in much the same way as buying stocks individually.
Do ETF pay dividends?
Yes, ETFs can pay dividends. If the ETF tracks stocks that pay dividends, these dividends are typically passed on to the ETF shareholders. However, the frequency and amount can vary depending on the ETF’s underlying assets.