Growth with ETF


Exchange Traded Fund or ETF is the latest investment tool that has caught the fancy of investors in the country. An ETF is an open-ended fund which consists of a basket of securities that are traded on an exchange. It is similar to index funds, but different in that they are traded more like a stock. The first ETF was launched in the US in 1993. Today around 279 ETF are listed and traded globally with assets under management touching $120 billion.

Unlike traditional mutual funds, ETF units are not sold to the public for cash. The asset management company that sponsors the ETF takes the shares of companies that constitute the index (say the sensex or the nifty) from large investors and institutions and in turn issues them ETF units.

Then how does a retail investor invest in an ETF? Retail investors can purchase a Nifty BeEs unit from any of the 10,000 NSE terminals present in over 400 cities. They can buy real time unlike in traditional MF where they have to wait until the end of trading. If you are a long-term investor, you must surely look at ETFs, they help insulate long-term investors from expenses arising from short-term trading activity due to repeated subscription and redemption pressures. Since ETFs can be traded intra-day, it also provides short-term investors with liquidity.

These funds have low annual expenses. Traditional MFs usually charge transaction costs. This is then loaded to all the subscribers. So if you are a long-term investor, you end up paying more. But in the case of ETF, as with stocks, only a brokerage has to be paid. If you are entering the market for the first time, ETF could be a safer bet than stocks, for an ETF can provide you a more diversified exposure.

A big advantage of investing in ETF is that you can make small purchases. You can buy even one ETF unit from the market. This allows you to gradually accumulate these units as and when you have funds.

But there is a catch. As with stocks, you must pay a brokerage to buy and sell ETF units. This can be a dampener if you plan to trade frequently or invest regular sums of money. The cost is fixed, based on many variables including the position of the underlying index on that day and dividends payable.

ETF also usually generate fewer capital gains than traditional MF thanks to the low turnover of the securities that comprise them. They are also not required to sell securities to meet investor cash redemptions.