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Exchange Traded Funds

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Welcome to this session on Exchange Traded Funds or ETFs.

If you want to participate in stock market but afraid of the risks associated with stock selection or Mutual Fund selection etc, then perhaps ETF is the closest alternative for you.

Exchange Traded Funds (ETF) are a special type of mutual fund schemes.

Unlike traditional mutual fund schemes, the units of ETFs are traded on a stock exchange.

We can put the buy (and sell orders) for ETFs from our equity stock trading terminal / software that is provided by our stock broker.

This is similar to transacting with Equity shares and other listed securities.

ETFs are open-ended funds.

This means that you can buy and sell like a regularly trade investment during stock market trading hours.

This means that unlike other Mutual Fund transactions, these transactions are real time.

They are processed immediately unlike in Mutual Funds in which they are processed after NAV is computed.

In fact, you can buy and sell on the same day itself, just like company equity shares.

This means that ETFs have the advantage of liquidity.

An investor in ETF need not have to fill in any additional form or provide any additional documentation for transacting in ETFs.

Their existing stock trading and demat account is sufficient to transact.

We just have to type in the ticker symbol for the ETF to start transacting.

For example, the ticker symbol for Reliance ETF Liquid BeES is LIQUIDBEES.

The minimum units for transacting in ETFs will usually be 1 unit.

ETFs will have an underlying tracking index such as Nifty 50, BSE Sensex 100 etc.

For instance, Birla Sun Life Nifty ETF Fund, Motilal Oswal MOSt Shares M50 ETF (MOSt Shares M50) etc. tracks the Nifty Index.

The performance and returns of these will be slightly similar to that of the Nifty index.

Diversification amongst AMCs

In general, it is always better to invest in a mutual fund company (AMC) that is larger in size and is professionally managed.

However, when you already invested in one or more schemes in an AMC, it is better to de-risk by not investing too much money into them.

This is where you can use smaller AMCs.

I will explain with an example.

If you already invested in some schemes in Aditya Birla Sun Life Mutual Fund for some of its schemes and now you want to invest in an ETF, it is better to consider investing in MOST M50 from Motilal Oswal MF instead of investing in Aditya Birla Mutual Fund.

MOST M50 returns will be same as that of BSL Nifty ETF because the underlying index that both schemes track is the same.

And by investing with MOST M50, you can free up and not have to overweight Aditya Birla Sun Life Mutual Fund in your portfolio.

List of popular ETFs

  • Edelweiss Exchange Traded Scheme - NIFTY (NIFTYEES)
  • ICICI Prudential NIFTY ETF (INIFTY)
  • Kotak NIFTY ETF (KOTAKNIFTY)
  • MOSt Shares M50 (M50)
  • Quantum Index Fund - Growth (QNIFTY)
  • Religare Invesco NIFTY ETF (RELGRNIFTY)
  • SBI ETF NIFTY (SETFNIFTY)
  • UTI NIFTY ETF (UTINIFTETF)
  • Birla Sun Life NIFTY ETF (BSLNIFTY)
  • ICICI Prudential CNX 100 ETF (ICNX100)
  • Kotak Banking ETF (KOTAKBKETF)
  • SBI ETF Banking (SETFBANK)
  • MOSt Shares M100 (M100)
  • SBI ETF NIFTY Junior (SETFNIFJR)
  • Kotak PSU Bank ETF (KOTAKPSUBK)
  • ICICI SENSEX Prudential Exchange Traded Fund (ISENSEX)
  • UTI Sensex ETF (UTISENSETF)
  • Reliance ETF NIFTY BeES (NIFTYBEES)
  • Reliance ETF NIFTY 100 (RELCNX100)
  • Reliance ETF Bank BeES (BANKBEES)
  • CPSE ETF (CPSEETF)
  • Reliance ETF Dividend Opportunities (RELDIVOPP)
  • Reliance ETF Consumption (RELCONS)
  • Reliance ETF Infra BeES (INFRABEES)
  • Reliance ETF Junior BeES (JUNIORBEES)
  • Reliance ETF PSU Bank BeES (PSUBNKBEES)
  • BHARAT 22 ETF (BHARATIWIN)

ETF CMP and Underlying Index

It is not necessary that the current market price (CMP) of the ETF and that of the underlying index be the same.

For example, the CMP of ETF and the Spot price of Gold in the open market will be different.

This is because the starting date for the ETF will obviously be different from that of the Index.

However, roughly to say, if the spot price of gold increases by one percent, the ETF CMP would also go up appropriately.

Gold ETF

ETF is an excellent avenue for investing indirectly in Gold.

Because ETF are mutual fund schemes, it is equivalent to buying paper gold.

So this is the official and best way of buying gold at the right market prices.

Unfortunately, Gold ETFs are not well received in India. Investors continued to lose sheen with investors pulling out over Rs 300 crore in April-August 2017. Trading in Gold ETF segment has witnessed outflows of Rs 775 crore in 2016-17, Rs 903 crore in 2015-16, Rs 1,475 crore in 2014-15 and Rs 2,293 crore in 2013-14.

Tracking Index

There are several ETFs, each tracking different index. For instance Birla Sun Life Nifty ETF Fund tracks Nifty

A Midcap ETF would track NSE Midcap index

A Gold ETF tracks Gold market rates

Actually gold is a commodity

Take UTI GOLD Exchange Traded Fund for instance

It tracks the Price of Gold (international market gold values)

Does ETFs have the top stocks from their respective index?

Not just top stocks but all the stocks that constitute the index.

ETFs in a way work just like index mutual funds.

Because the composition of the ETF will be similar to that of an index, such as Nifty 50, BSE 100 etc.

Difference between ETF and Index Mutual Fund

ETFs are different from Index funds becuase of two reasons.

1. ETFs ae freely traded on stock exchanges.

2. In Index funds, the buy / sale will be at a single NAV price determined at the end of the day.

But in ETF, because they are listed on stock exchange, the buy and sell of units will happen depending on the buyer / seller demand.

Similar to stock trading Ryt?

Yes. ETFs can be traded on stock exchanges in a similar way we do stock trading.

What are the advantage of an ETF over other types of mutual fund schemes?

A key benefit of an ETF is that

=> investors can buy and sell their units in the stock exchange

=> at various prices during the day that closely track the market at that time.

I think no exit and enter load

Yes. They will not have any load

ETFs are cost-effective becuase the fund manager only charges for the scheme running expenses.

Since his intellience or expertise is not used, they are cheaper even compared to index funds.

Of course, the investor would have to bear a brokerage cost, demat chargest etc. when he transacts using the demat.

And if you have a discount broker who does not charge for delivery transactions, you can make a steal!

This is all i have about ETFs for today!

How does one invest in direct plans of mutual funds. Is there a online platform which one can use

For Direct plans, you can invest directly with AMC i.e the Mutual fund from the MF website

If you have invested in several mutual fund companies, you can use MyCAMS so u can have a consolidated view at http://www.camsonline.com/myCAMS.aspx

Mutual Funds and Demat

To invest in mutual funds one needs to have demat?

No. Demat is not required for investing in Mutual funds.

It is however required if you want to trade or invest in Exchange Traded Funds.

Lock-in for ETFs

Is this have any lock-in period? Somewhere I heard.

The primary advantage offered by ETFs is that they can be easily traded as soon as they get listed on the stock exchange.

So, ETFs will not have any lock-in period.

How to buy the ETF?

Login to your stock trading terminal such as ICICI Direct or Zerodha.

After logging in, search / add the name of the ETF that you wish to transact.

Example: SETNIF50 for SBI Nifty 50 ETF, M100 for Motilal Oswal Midcap 100 or LIQUIDBEES for Reliance Liquid BEES etc.

Once the ticker is added to your watch list, you can start placing your orders.

The overall process is same as that of buying a company equity share.

Alternatively you can buy the units from the Mutual Fund Registrar website / official Mutual Fund website.

Reliance ETF Junior BeES

Reliance ETF Junior BeES is an ETF that NIFTY Next 50 TRI.

The NIFTY Next 50 Index represents 50 companies from NIFTY 100 after excluding the NIFTY 50 companies.

The NIFTY Next 50 Index represents about 11.9% of the free float market capitalization of the stocks listed on NSE as on March 31, 2017.

The total traded value for the last six months March 2017 of all index constituents is approximately 15.4% of the traded value of all stocks on NSE.

Impact cost for NIFTY Next 50 for a portfolio size of Rs.25 lakhs is 0.04% for the month March 2017.

Liquid BEES

LIQUIDBEES is the name of Liquid ETF product from Nippon India Mutual Fund (formerly Reliance Mutual Fund).

It is used to park surprlus funds for few days so as to get slighly fixed-deposit type returns.

The units of Liquid BEES have to be purchased in the stock broker intereface and are held in demat format.

They are traded instruments and hence can be purchased or sold duing stock market hours.

A demat-exit charges will apply when units are sold from the demat account.

The amount of charge depends on the stock broker.

Most borkers charge from Rs. 12 to Rs. 18 irrespective of the number of units being sold.

Is there any Short term / liquid fund that helps me park money that I want to use for my equity trading and investing purpose?

If you have some account balance idle with your stock broker, you can better park it with LIQUIDBEES.

For example, if i have, say Rs. 50k in my broker account, I will buy 49 units of LIQUIDBEES.

Each LIQUIDBEES unit will always be at Rs 1000 per unit (or Rs 999.99 or Rs 1000.01 sometimes)

You can buy or sell these units online from your stock trading terminal

These transactions are allowed during stock market trading hours only.

Upon selling the units, the funds will become immediately available in your ledger account and you can start using the funds.

Profit / Gains from the LIQUIDBEES will be in the form of small fraction of dividend units.

Script Name: RELIANCE ETF LIQUID BEES

Stock Code: LIQUIDBEES

This is useful if you want to use it consistently and not for one or few occasions.

Suppose we purchased yesterday so we can sell today also?

Yes. You can buy and sell even on the same day also. They are just like equity shares.

The disadvantage with this is that you can redeem it only when you accumulate the dividend units into a full unit.

i.e You should make a profit of Rs 1000 so as to get the gains redeemed.

The broker will send in a statement of the transactions, ie purchase, redemption and units being accumulated.

Brokers like Zerodha allow using Liquid Bees investment as a pledge collateral to extend margin. Read more on this at https://tradingqna.com/t/what-are-liquid-bees/148

Determining Dividend Units

Liquid BeES gives daily dividend which is compulsarily reinvested.

When Rs 1000 worth of dividend is accrued, you get one additional unit towards the dividend.

This additional dividend units are added at the end of the month.

So, wait for the completion of the month to ascertain if the dividend unit got added to your demat.

Please contact your broker to send a Statement of Account for the Liquid BeES transaction so that you can determine this for yourself.

Dividend Policy

The Fund will endeavor to declare Dividend on a daily basis so as to maintain the NAV of the Units of the Scheme at its face value of Rs.1,000/-.

The Fund will declare Dividend only if the NAV of the Scheme is above its face value and Dividend declaration will be solely at the discretion of the Fund/AMC.

Dividend declared on daily basis will be compulsorily reinvested in the Scheme and Units arising out of Dividend reinvestment will be credited to the account of the Investor with the Depositary Participant.

Dividend will accrue on Saturday and Sunday also. As the Units of the Scheme are in demat, the holding statement issued by the Depository Participant would be deemed to be adequate compliance with requirements of SEBI regarding dispatch of statements of account with respect to Units issued due to reinvestment of Dividend.

Fractional Units

The reinvestment of Dividend in the Scheme may result in the fractional Units. The Units will be allotted upto three decimals.

The Scheme provides for buy back of fractional Units on ongoing basis.

Buy back of Fractional Units of the Scheme

The Scheme declares daily Dividend and the same is compulsorily reinvested in the Scheme on daily basis. The Units arising out of Dividend reinvestment result into fractional Units. The Dividend reinvestment Units are uploaded upto three decimals periodically in the beneficiary account of the Unit holder held with the Depository.

As the minimum trading lot on NSE is 1 (One) Unit, the fractional Units of the Scheme cannot be traded on NSE. In order to provide an exit option to Investors who are holding fractional Units of the Scheme in their demat account, the Scheme will offer a buy back facility to Unit holder holding fractional Units in Reliance ETF Liquid BeES. The buy back will be processed on the first Working Day of the week. The detailed process of buy back of fractional Units is mentioned in instructions attached to the Application Form and also on our website www.reliancemutual.com

In addition to this Investors may also avail the facility of redeeming fractional unit through NSE MFSS and BSE StAR MF platform. The minimum and maximum number of unit allowed for redemption are 0.001 unit and 0.999 unit respectively.

Investor should note that the facility for buy back of Reliance ETF Liquid BeES is only for fractional Units. Units in lot of 1 or in multiples of 1 should be sold on the Exchange only.

Liquid BEES vs Savings Bank account

Liquid Bees are good instruments to hold park money in a secured way and get month-end dividend units.

However, it cannot be a replacement to a savings bank account.

This is because, when you need funds, you have to sell the units and the funds come to your share broker ledger.

From there, you need to withdraw and get them to your bank account.

This process might take 1 or 2 days.

The closest alternative for this is to use Liquid Mutual Fund Schemes such as those from Reliance Mutual Fund.

This is because you get an Reliance ATM Card which provides you the necessary liquidity.

Direction of Nifty and a Nifty 50-based ETF

Q: Nifty fluctuates during the day. Does Nifty ETF also fluctuate along with Nifty or is it independent based on the demand and supply for Nifty ETF?

Theoretically, the direction of ETF price moment and that of the underlying benchmark index (such as NIFTYBEES and NIFTY 50 for example), should be in the same direction. This is true for those ETFs that are well traded on the stock exchange.

If the ETF does not have sufficient liquidity and trading volumes, there will be a disconnect between the two.

Hence, selecting the right ETF under a given benchmark indes is important.

Quick Revision

Lets have a quick review on *Exchange Traded funds (ETF)*

1. ETFs are open-ended mutual fund schemes but can be traded in stock exchanges.

2. ETFs are to those who want to invest in equities in a indirect manner but still do not want a fund-based approach.

3. We need a demat account to trade in ETF.

4. ETFs will have a tracking index. such as Nifty 50, Midcap 100 etc

5. ETFs is an excellent tools for investing indirectly in Gold.

6. ETFs are similar to index funds but are cheaper because fund manager expenses will be low.

Related Lessons

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