ETF has been rising in popularity among Indian retail and institutional investors over the last few years. ETF AUM has multiplied by almost 4 times in the last 3 years and the annual CAGR growth in ETF assets have been over 50%. Also, ETF has overtaken liquid funds as the largest mutual fund category as far as the AUM is concerned.
Benefits of ETF
- ETF has low cost.
- There is no unsystematic risks in ETF as they track an Index and do not manage stocks actively.
- No human behavioural biases in ETF as the same replicate/ tracks an index.
How are ETF units bought or sold in the exchange?
ETF is bought or sold in stock exchanges like any other stocks. Unlike regular mutual fund schemes, the unit price of ETFs keep changing during the trading hour. Therefore, you need to be very cautious if you are buying or selling at the right price. Even though the ETF NAVs are published along with other mutual fund schemes at the end of the market hours, they trade during the markets hours on bid-ask price of the ETF depending upon the liquidity of the ETF.
Therefore, buying and selling ETF on NAV prices is not possible on stock exchanges.
Whereas in case of regular (non ETF) schemes you can invest in mutual funds online. The NAV of the units bought or sold online, is applied at the end of the day. That effectively means, when you invest in mutual funds online, you only know the last day’s NAV and not the NAV on the day you are transacting. You come to know about the NAV only next day when the units are allotted to you and confirmation is sent by the AMC.
What are the factors to consider for investing in ETF?
- Average daily trading volumes: Average daily trading volumes of an ETF indicate as to what number of ETF units are traded daily on an average basis. High trading volumes indicate the liquidity of an ETF, and therefore, it may be easier for you to sell your ETF units on the stock exchange. You can check the average trading volumes of ETF on the website of BSE and NSE.
- Tracking error: Tracking error is the deviation of ETF returns from the return of the index it is tracking. Investors can find the tracking errors of ETFs in the monthly factsheets issued by the AMCs. It is always advisable to invest in ETFs with low tracking errors.
- Total Expense Ratio (TER): Total expense ratio percentage or TER % is the cost of managing the ETF scheme on a per unit basis. It is calculated by dividing TER of the ETF with the assets under management (AUM). TER on a per unit basis are deducted from the schemes assets (per unit) to arrive at the Net Asset Value (NAV) of the Investors should always look for ETF schemes with the lowest TER (%) provided the ETF has enough liquidity and low tracking error.
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