Index etfs

vignesh 946
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Hi pankaj

I have sucessfully started investing in mutual funds on your advice.I am also investing in Tax saving mutual funds.

I want your thought on the index based etf. I came to a conclusion that etf are the best low cost product than the funds of funds.

  1. NIFTY BEES ,GOLD BEES, and BANK BEES.

I have selected some of these and thought of starting sip in these. But am afraid of the brokerage we pay every time for the transaction. Normal index fund gave some 15 to 17 percent but index based etf given 20 to 22 percent returns.

Which one will be cost effective? Pls i need your view on these.

Regards Vignesh

index-fund nifty-bees gold-bees exchange-traded-fund etf mutual-fund
1 Answers

Exchange traded funds (ETFs) are one of the best investment method if you want to invest in indexes.
- They have very less expense ratio(0.05-1.6%) as compared to mutual funds (1.5-2.5%).
- They are traded real time like stocks. Intraday trading can also be done in these.
- here is no fund manager's intelligence involved and they move as per benchmarks.
- There would be demat charges, STT and brokerage applied on buy/sell transactions.

Some disadvantages I see are:

  1. Not very popular as of now. If you want to sell on a day, you may not find good number of buyers and may have to sell at a somewhat smaller price.
  2. Not all trading account offers SIP for these as their prices changes multiple times in a day. If SIPs are not there, they are bit complicated to trade online.
  3. If one does not already have a demat account, cost of maintaining and opening account should also be considered.

Make sure to pick an ETF with lowest expense ratio and tracking error (difference between the returns delivered by the fund and that of the benchmark index).

A recent table of expense ratio and tracking error is shown below:

etf expense ratio and tracking error

Pankaj Batra5212

Hi pankaj

where can i see the actual expense ratio of the etf?

which brokerage are you familiar with for trading etf?

if i start sip in the etf will they deduct the brokerage ,stamp duty and all charges every time?

While seeing those costs is it better to go for the index mutual funds as it is more convenient? buying an index based fund or buying an etf (expense ratio + brokerage+ annual amt for demat) will both are equal finally in long term prespective?

I want you to explain clearly the first point of disadvantages: say after 4 yrs i got etf for 5 lakhs i want to sell that if no one is willing to buy then what will be my position?

Is this a secured invesment? not returns, is there some regulatory board tere?

please kindly answer my questions .

Regards Vignesh

vignesh•

@vignesh You will have to go through ETF offer document to check their expense ratio. e.g. search for expense in this kotak nifty ETF document(http://www.kotakmutual.com/kmw/downloads/offerdocuments/k_NiftyETF_SID.pdf)

Almost all of the of the brokerage offer ETF trading online like ICICI Securities, Kotak securities, Indiabulls etc.

There is no SIP in ETFs, if brokerage offer some SIP kind of auto investment, it will same as transacting yourself on a fixed date. It will have same brokerage, STT, service tax etc deducted everytime.

If you already have demat account and paying annual charges for same, then it make sense to buy ETFs. A disadvantage with index mutual fund is that, they may have an exit load (can be 1% even), if you redeem before a particular time period.

Pankaj Batra•

It won't be that bad situation as you mentioned, say after five years you want to sell ETFs for 5 lakhs, there will be buyers but in a smaller number and you may have to sell units at somewhat less price (not that less). As trading works on bidding model and its a supply demand game. Demand for ETF would increase in future as people gain knowledge and benefits for same.

SEBI controls these funds and there would not be issues in regulation as such. But returns would depend on market condition and is risky in nature. These are as safe as mutual funds.

Pankaj Batra•
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