ETF Investing in India – Part 1

Exchange Traded Funds (ETF) have been generating a lot of curiosity in the investor community in the past few years. ETF Investing in India is still at a nascent stage, however volumes have been picking up.

ETF Investing in India

Indian markets have seen lack of liquidity in ETFs due to lack of both interest and awareness from the investor community. But in FY 17 and FY18, the Government’s push on the CPSE and Bharat 22 ETFs has made investors consider investing in ETFs.

1. What is an ETF?

An ETF is a unit which tracks a particular index, fund or a commodity. It is similar to an underlying of a that index, fund or commodity. As the name suggests, an ETF is traded on the stock exchange.

Eg: NIFTYBEES is an ETF which tracks NIFTY and is usually 1/10th of the the NIFTY INDEX. Suppose NIFTY is at 10700, NIFTYBEES will trade approximately around 1070, but due to accumulation of dividend, the price of NiftyBees will be higher. Because it is traded on the stock exchange, the demand-supply impacts the price.

ETF Investing India

ETF – Another investment avenue

2. How do I buy an ETF?

ETFs trade like equity shares on the stock exchange. Unlike mutual fund investments, ETF investments require a demat account.

3. Can I trade an ETF for intraday?

Yes, as an ETF is just like an equity share, you can trade it at intraday brokerage charges as well. However, ETFs are not for trading but are for investing.

4. What is the cost of ETF Investing in India?

Apart from the normal brokerage costs, ETF’s generally have an expense ratio similar to that of the mutual funds. This cost ranges from 0.5%-1.25% per annum. Although, the cost in India is pretty high compared to what it is in other developed countries (0.2%-0.3%), it is expected to come down. Due to low liquidity, the ETFs have wide bid-ask spreads which results in a high impact cost. The Short-term capital gains tax and the Long-term capital gains tax is the same for ETF and equity shares.

In this blog post, we have covered the basics of ETF Investing in India. So, to know the ETFs that you can invest in, read the second part of the blog here: ETF Investing in India – Part 2.


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