Question 1

I want to invest in ETFs but do not have demat account

Accepted Answer

EWithout having a trading and demat account with a stock broker, you cannot invest in ETFs. However for any reason, if you are unable to open a trading and demat account, you can invest in “ETF like” investment products where you can invest in a passive fund which tracks an index. These are called Index funds which like ETFs aim to track a particular index like Sensex, Nifty, BSE – 100, Nifty 100, Bank Nifty etc. The fundamental attributes of index funds are like ETFs however Index funds are not listed on the exchange, while the investment process (purchase and redemption) is just like any other mutual fund scheme. The expense ratios of index funds are slightly higher than ETFs.

Question 2

What is the scheme characteristic of Exchange Traded Funds in India?

Accepted Answer

ETFs are open ended schemes which try to replicate the return of an Index it is tracking. The fund has to invest minimum 95% of its total assets in securities of the Index that it is tracking.

Question 3

When the ETF NAV is calculated

Accepted Answer

ETFs can be bought and sold only on stock exchanges on a continuous basis like stocks. Unlike mutual funds where the prices (NAV) are declared at the end of the day, ETF prices keep changing during the entire trading session. At the end of the day, however, you will get the closing NAV of the ETF.

Question 4

What is the difference between ETFs and actively managed Mutual funds?

Accepted Answer

In mutual funds, the AMC acts as counterparty to the investor. Investors do their buy / sell transactions with the AMC whereas ETFs are listed on stock exchanges like shares. Investors can buy or sell ETFs in the stock exchange at a real time price. Mutual fund NAVs are priced at the end of the day. However, just like shares, ETF prices change real time throughout the day based on demand and supply in the market. You can invest in mutual funds directly through AMC or through an AMFI certified mutual fund distributors (MFD). However, to invest in ETFs, it is mandatory to have a demat and trading account with a stock broker. ETFs do not aim to create alpha over the benchmark index that it tracks; it aims to replicate the returns of the benchmark index. Being passive funds, the ETF expense ratios are much lower compared to actively managed mutual fund schemes.

Question 5

What is the difference between ETFs and Index Funds?

Accepted Answer

Many investors use ETFs and index funds synonymously which is not correct. Though there are few similarities between them, the investors must understand the differences between the two. The most important difference between index fund and ETF is that, index funds are mutual fund schemes to invest in which you do not need demat or share trading account since they are not listed on the exchange. You can buy index funds directly from the AMC or through a MFD like any other mutual fund schemes. But to invest in ETFs you must have demat and share trading account. ETFs are cheaper than index funds. If you buy ETFs there is no securities transaction tax (STT), but when you sell then STT is applicable. Also, you have to pay brokerage every time you buy and sell ETFs. In addition to STT and brokerage, investors also have to pay charges for the demat account for holding the ETFs in electronic form. Index funds can be bought just like any other mutual fund scheme but their expense ratio is slightly higher than Exchange traded funds.

Question 6

What is the difference between ETFs and F&O?

Accepted Answer

Some investors may buy or sell an ETF in the Futures and Options (F&O) market, with a much lower capital outlay compared to a basket of stocks. Given current lot sizes in the NSE and margin requirements, minimum capital outlay in ETFs will still be much lower compared to futures. While Futures and options have expiry dates (last Thursday of the month), ETFs have no expiry date. You can invest in ETF and hold it as long as you want. In summary, F&O are trading products, whereas ETFs are investment products. In F&O you can take a much bigger position with a smaller capital outlay. While your profits may be high, your losses can also be high. F&O positions are marked to market and in case of market correction; investors may have to provide additional money for maintaining margin even before expiry. ETFs are not leveraged positions and hence there is no margin requirement. During market correction, your ETF NAV will fall but you will not have to pay any additional money. Risk in ETF is therefore, much lesser than futures.

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