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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 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 software that is provided by our stock broker.

ETFs are open-ended funds. This means that you can buy and sell like a regularly trade investment.

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.

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.

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 lockin period.

Liquid BEES

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

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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