ETFs as an investment vehicle have received a phenomenal response in the last 5 years, with the total category AUM growing at a rapid pace in India. It has grown by over 26 times from just Rs 7,000 crore to over Rs. 2 lakh crore (Equity and debt combined). Chintan Haria, Head- Product Development & Strategy, ICICI Prudential AMC, answers all your questions here about ETFs Investment in India:-
Why sudden spurt in ETFs interest?
Owing to increased levels of awareness among investors, digital adoption and product innovation over the years, investors have begun appreciating the potential of ETFs. This investment tool combines the trading flexibility of a stock, coupled with diversification and low costs of a mutual fund. The fact that ETFs offer exposure to a basket of stocks at a fraction of the amount and is relatively safer when compared to direct investing has elicited a favourable response from investors.
ETFs de-jargoned
ETFs invest in a basket of stocks mirroring the performance of the underlying index by holding the securities in the same proportion. ETFs are traded throughout the day at prices that vary based on supply and demand. The important thing to take note of is that an investor needs to have a demat account to buy or sell ETFs.
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Minimum investment limit in ETFs
Equity ETFs – One can purchase as low as a single unit, at per unit cost. There is no minimum investment limit
Bond ETFs – Minimum investment is of Rs 1,000 and in multiples of Rs 1,000 thereafter
Gold ETFs – Minimum investment in gold ETF is 1 unit
Why Buy ETFs?
Investors can consider investing in ETFs due to the following benefits:
-Easy to trade – You can buy and sell ETFs any time of the trading session through the day
-Cost efficient – ETFs tend to have lower expense as compared to other investment options
-Transparency – Most of the ETFs are index-based so the constituents are well known
-Ease of transaction – Because ETFs are traded like stocks, investors can place a variety of order types
-Diversification – As ETFs track a basket of assets, investing in them provide diversification benefits
Debunking top ETF myths
1# Myth – ‘ETFs only offer broad-market exposure’
Truth – While some ETFs offer broad-market exposure by tracking a broad market index, such as the Sensex or Nifty, the ETF landscape has greatly evolved to include a much broader choice of ETFs, including pin-pointed products that target narrower market indices (midcap), sectors (banking), assets (gold, liquid), specific factors or rules like low volatility, value etc.
2# Myth – ‘ETFs don’t pay dividends’
Truth – When a constituent stock of an ETF declares dividend, the said dividend gets added to the NAV of the ETF and in turn adds to the wealth of the investor
3# Myth – ‘ETFs are not liquid’
Truth – Illiquid ETFs were a concern in early 2000, when ETFs were just launched. However, as the market expanded with more and more investors coming into the ETF fold, liquidity is no longer a concern. Remember, ETFs derive liquidity from underlying assets. In an extreme scenario, in case of liquidity issues, an investor can approach the ETF issuer to create and redeem ETF units.
To conclude, ETF emerges as the simplest route to take exposure to equity markets. First-time investors should choose broad-based ETFs to start their investment journey. However, evolved investors are preferring investments in smart beta ETFs which select and also may assign weights to the constituent stocks basis factors such as Low Vol, Alpha, Value etc.
