<p><em>Low-cost way to participate in the equity market is through ETFs right from your demat account, writes<strong> Sunil Dhawan</strong></em><br><br>Exchange traded funds (ETFs) may soon become a popular investment option for investors. According to National Stock Exchange (NSE), India’s premier stock exchange, ETFs have already seen an increase of 25 per cent in retail participation by investors in the past one year.<br><br>ETFs have been very much in existence here in India for long and certain recent developments around the product may give it the right boost. Of late, the ministry of Labour had already given the mandate to EPFO to put its corpus into equities. Starting 1st July, EPFO has decided to take the ETF route rather than putting money directly into the share in the secondary market. Around 1 lakh crore is the incremental corpus for EPFO and anywhere between 1-5 per cent of that could land up in ETFs in year’s time.<br><br>NSE has recently started disseminating the value of NV20 live on its terminal. NV20 is an index representing 20 most liquid blue chip companies listed on NSE and provides exposure to eight broader sectors of the economy, with Infosys, ICICI Bank and RIL being the top three weighted companies in the index. Reliance Mutual Fund is about to launch ‘R*Shares NV 20’, an ETF that would track NV20. There are more ETF launches in the pipeline especially the GILT ETF’s from various fund houses.<br> <br><strong>What Are They:</strong> Ever thought of buying into the Nifty Fifty index during the trading hours? Let’s say, you decide to invest in the index on the first of every month and to top it up on every big fall of the index. ETFs fits the bill and can be the instrument to ride on the wave of stock market.<br><br>For starter, ETFs are mutual funds schemes that are bought or sold only on a stock exchange. So, what one needs to invest in ETFs would be a demat account through which unit can be bought anytime during the trading hours right from the comfort of your office or home. The cost that one incurs includes only the fund management cost and the charge for the demat account. ETFs are low cost investments with expense ratio between 0.30 to 1 per cent and so it costs less than investing in funds offline. One may even buy one single unit of ETF on any given day.<br><br><strong>What Is ETFs' Track:</strong> Unlike mutual funds schemes that can either be an index fund or diversified fund holding stocks of various sector, ETF’s are typically funds that tracks a specific index. In a way, ETF’s can be said to be index funds that can be traded online. So, an ETF would comprise of stocks that has the composition of an index such as S&P CNX Nifty or the BSE Sensex. If you are bullish on a specific sector and if there’s an ETF tracking that sector, you can invest in it. The various categories of ETF that are available can include index ETF’s, Gold ETF’s, Sectoral ETF’s, Thematic ETF’s or even the Liquid ETF’s.<br><br><strong>Return Potential:</strong> Before investing in ETFs, it’s important to understand its potential to generate returns. In ETFs, the role of fund manager is absent as the ETF would merely track the index. So, do not expect active fund management and thereby the potential for high returns. Returns would largely be in the line of the index or market. If over 12-year period, markets generate 12 per cent annualised return, the ETF would also generate around that. Remember, ETF’s (even index funds) will have a tracking error no matter how closely it tracks the index that it represents. Lower the tracking error, better is the fund.<br><br><strong>Watch Out:</strong> A word of caution for ETF investors. It’s not only easy to invest but also easy to sell ETF units at the click of the mouse. But, that should not be the reason to start timing and trading the markets through ETF. Stick to them for long term to reap the benefit of compounding over long term.<br><br><strong>What To Do</strong>: ETFs are the right product for beginners. If you wish to invest to invest through ETFs for your long term needs, here’s a strategic move for you. Build a portfolio of ETF comprising the NIFTY Index fund and even the ETFs representing large and mid-cap stocks (Nifty and junior Nifty). Add Gold ETF to your portfolio and there you have a diversified ETF portfolio for your long term goals such as children education, marriage and even own retirement at lowest possible cost.<br><br><br>sunil@businessworld.in<br> </p>
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