Invest In India

Exchange traded funds or ETF have been in existence for ages but are a novel concept in the Indian market. As with every emerging market the novelty of the product leads to on the brave of heart investing in the same, even though returns from such investments remain to be above par even in the volatile markets that we are plagued with in recent times.

Gold investments traditionally in India have been in the form of buying gold in physical form on a variety of occasions. In our country, investments since donkey year`s people have bought gold jewelry on various occasions. Apart from the cost price being eroded over time these investments also face risk from various factors such as theft, resale concerns, quality assurance, making charges, less tax efficient in absence of wealth tax and long-term capital gains tax. With the Indian markets opening up, a bouquet of products & investment products are being showcased to the Indian investor. Various AMCs have already begun strategically launching new products that are solely dedicated towards investing in a variety of companies, which deal in this soft yellow metal. So the question remains what makes an ETF better than a Mutual fund??

The Risk-Return Trade off – Why Invest In ETFs

The basic concept of a mutual fund allows an investor`s money to be professionally managed by a fund manager, however with this an investor is left to burden the cost associated with it which can be a maximum of 2.5% of the AUM of the specific scheme. Compared to this ETFs are passively managed, have low distribution costs and minimal administrative charges, hence most ETFs have lower expense ratios than conventional mutual funds.

Systematic Wealth Creation Through ETFs

With a majority of working Indian investors being from the salary class the systematic investment plan (SIP) offered by mutual funds look very attractive as a small scale saving option. However SIP in ETF is not convenient, as the investor has to place a fresh order every month. Also SIP in mutual funds may prove expensive as compared to a no-load, low-expense index funds as you have to pay brokerage every time you buy & sell but investors cannot automatically re-invest your dividends.

Secondly, investors may have to pay brokerage to reinvest dividends in ETF, whereas dividend reinvestment in MFs is automatic and with no entry-load But ETFs are conveniently traded on various stock exchanges, like a stock at any time of the day and at real-time prices, while the market is open. Investors are also able to short sell an ETF or buy on margin or even purchase one unit, one can buy MFs only at the NAV based on the closing prices.

Concluding Views

As market valuations become fair or over-valued, it will become more & more difficult to beat the index. Then index-based funds (both conventional MFs & ETFs) may become a better option than actively managed funds Gold ETFs or Real-Estate ETFs have no comparable product in the conventional MF sector, and hence become the only MF route to invest in such markets. To an investor who is bullish on long-term & defensive investment strategy in equity an index linked portfolio would be more attractive than a actively managed portfolio. ETFs offer alternatives to an index-based fund however as most investments are subjected to market risks a case-to-case comparison is, however, important, as some index-funds may be cheaper. Also for SIPs, index-funds may prove better than ETFs.