How to invest in ETF?

Exchange Traded Fund or ETF is the fastest growing category of mutual fund in India. In the last 3 years assets under management (AUM) in ETFs grew at a compounded annual growth rate of (CAGR) 45% (source: AMFI, 29th July 2022). With AUM of over Rs 4.5 crores ETF is the largest category of mutual funds in India (source: AMFI, 29th July 2022). In this article, we will discuss about ETF and how to invest in ETF.  

What is Exchange Traded Funds?

ETFs are passive schemes which invest in a basket of securities that track a market index or the price of a commodity (e.g. gold, silver). ETFs do not aim to beat the index, they simply track the index i.e. generate same returns as the index. ETFs are listed on stock exchanges and trade like shares of companies. The two main advantages of exchange traded funds are no unsystematic risk and much lower cost compared to actively managed mutual fund schemes. 

How to invest in ETF?

You need to have Demat and trading accounts to invest in exchange traded funds or ETFs. If you do not have Demat and trading accounts, you need to contact a stockbroker to open Demat and trading accounts. There are two ways of investing in ETFs – through your stockbroker or directly with the Asset Management Company (AMC).

How to invest in ETFs through your stockbroker?

During the New Fund Offer (NFO) period, you can buy units of exchange traded funds or ETFs at par value (usually Rs 10 per unit). After the NFO period, you will have buy ETF units in stock exchanges through your stockbroker. ETF transactions in stock exchange take place on the basis of the market price (ask / offer price) just like stocks. The market price of the ETF may be different from the net asset value (NAV). Brokerage, securities transaction tax (STT) and other transaction costs will apply. 

 How to invest in ETFs through the AMC?

During the NFO period, you can buy units of exchange traded funds or ETF mutual funds at par value (usually Rs 10 per unit) from the AMC. You will have to provide details of your Demat account, even if you are investing in exchange traded funds or ETFs through the AMC during the NFO because the ETF units will be stored in demat form. After the NFO period, you can buy units directly from AMC at prevailing NAVs, if you are transacting in lot sizes (also known as creation units) as specified by the AMC. Usually, the lot size in ETFs is much larger than the average investment size of retail investors. 

How to sell / redeem ETFs?

You will have to sell / redeem your exchange traded funds or ETF units in the stock exchange at market prices (bid price) unless you are transacting in lot sizes (creation units). The price at which you sell your ETF units in the stock exchange can be different from the NAV. If you are transacting in lot sizes, you can redeem your ETF units directly with the AMC at prevailing NAVs. You should refer to the scheme information document to know the lot size (creation units) of your ETF.

Conclusion

ETFs are popular mutual fund investment in developed markets and are also gaining in popularity in India. ETFs are different from other mutual funds in a sense that, you will have to buy / sell ETFs in stock exchanges unless you are transacting in lot sizes.