ETF Investing for Beginners | Exchange Traded Funds | How to Invest in ETF | ETF vs Mutual Funds
Summary
TLDRThis video script delves into the world of Exchange Traded Funds (ETFs), a financial instrument often overshadowed despite their global assets under management reaching 11.5 trillion dollars. The speaker highlights the growth of ETFs in India, their benefits like simplicity, diversification, low cost, and real-time trading. It contrasts ETFs with index funds, emphasizing differences in liquidity, expense ratios, and investor preferences. The script also addresses concerns like tracking error, impact cost, and taxation, providing a comprehensive guide for potential ETF investors.
Takeaways
- 😀 ETFs, or Exchange Traded Funds, are a significant yet often underplayed financial instrument, managing nearly 11.5 trillion dollars globally.
- 🌟 In India, ETFs gained momentum after government recognition in 2013 and are now a rapidly growing asset class, increasing from 12,000 crores in 2015 to over 50 times that amount.
- 📊 ETFs are tradeable securities that track an index, a basket of assets, commodities, or bonds, offering diversification and transparency with daily holdings disclosure.
- 💡 The benefits of ETFs include simplicity, cost-effectiveness, real-time trading, a wide range of choices, and a generally low expense structure.
- 🏦 ETFs offer real-time NAV pricing, allowing investors to capitalize on market fluctuations the same day, unlike mutual funds which process transactions the following day.
- 📈 There's a vast array of ETFs available, from broad market indices to thematic, factor-based, international, and even debt-based ETFs, catering to diverse investment strategies.
- 💰 ETFs are known for their low expense ratios, with some funds having ratios below 0.1%, significantly lower than traditional mutual funds.
- 🚨 Investors should be aware of incidental costs associated with ETFs, such as brokerage commissions, demat charges, STT, SEBI turnover fees, and the bid-ask spread.
- 🔄 Liquidity is a key consideration for ETFs, as low liquidity can affect the ease of buying and selling, and can lead to higher price volatility.
- 🔍 Tracking error, the deviation between an ETF's performance and its tracked index, is influenced by various factors including the ETF's expense ratio and cash holdings.
- 💡 Impact cost, the additional cost incurred due to market liquidity conditions, is an important factor affecting the total returns on ETF investments and can vary significantly based on trade size.
Q & A
What is an ETF and how does it work?
-An ETF, or Exchange Traded Fund, is a tradeable security that tracks an index, a bond, a commodity, a basket of stocks, or any other assets. It operates by replicating the performance of the underlying assets it represents. ETFs can be bought and sold on an exchange during trading hours, similar to stocks.
Why have ETFs gained significant traction globally and in India?
-Globally, ETFs manage almost 11.5 trillion dollars as of 2023, and in India, they have grown over 50 times since 2015. This growth is attributed to increased recognition by the government, inclusion in disinvestment initiatives, and significant investments by organizations like the EPFO.
What are the benefits of investing in ETFs?
-ETFs offer simplicity, diversification, transparency, and cost-effectiveness. They provide real-time trading, a wide range of choices, and low expense ratios compared to other investment options like mutual funds.
How do ETFs compare to index funds in terms of structure and benefits?
-While both ETFs and index funds track indices and are passively managed, ETFs offer real-time trading, do not impact other unit holders with inflows and outflows, and generally have lower tracking errors. They also tend to have lower expense ratios.
What are some concerns or drawbacks associated with investing in ETFs?
-Investors should be aware of incidental costs like brokerage fees, demat charges, and the bid-ask spread. Additionally, concerns include liquidity issues with thinly traded ETFs, tracking error, and impact costs which can affect the total returns.
How does the liquidity of an ETF impact its performance and investment?
-Liquidity is crucial as it affects the ease of buying and selling ETFs. Low liquidity can lead to difficulty in executing transactions and may result in wild price swings, affecting the NAV and potentially the investor's returns.
What is the impact cost in the context of ETFs and why is it important?
-Impact cost refers to the potential cost incurred for executing a trade due to prevailing liquidity conditions. It is a measure of liquidity risk and reflects how much the ETF's market price is influenced by the size of the trade, which can significantly affect returns.
How do dividends received by ETFs affect the investor's returns?
-Dividends received by ETFs are typically reinvested back into the scheme to maintain the tracking of the underlying index. This reinvestment is crucial to minimize tracking error and ensure that the ETF's performance closely mirrors the index.
What are the tax implications of investing in ETFs in India?
-ETF returns include dividend income, which is added to the investor's annual income and taxed according to the income tax slab. Capital gains from ETFs are subject to short-term capital gain tax if held for less than a year, and long-term capital gains tax if held for over a year, with certain exceptions for asset allocation ETFs.
How does one go about buying and selling ETFs in India?
-To invest in ETFs, an investor needs a trading account with a broker and a demat account with NSDL or CDSL. ETFs are identified by specific symbols on stock trading platforms, and investors can buy or sell them during market hours, with the units reflecting in the demat account the next day.
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