3 Points to understand ETF

#1 Why you should care about ETF’s
Investors expect mutual fund mangers to outperform the markets since they are paying them for it.However in the recent crash most MF did worse than the index and when the markets picked up steam most MF managers were holding huge amount of cash.

So you may ask- is paying money to loose money a smart thing to do?
Let’s look at an alternative Mr. ETF. ETF allows us to diversify into a basket of multiple stocks and yet trade just like a single stock. ETFs trade at prices that closely match their underlying assets, so for example a Gold ETF like “GoldBees” is based on domestic gold prices similarly another one based on prices of basket of index stocks - "NiftyBees" or bank stocks etc.

#2 How does ETF compare with an diversified mutual fund ?

Mutual funds are not listed on the exchanges. When you purchase shares in an open-ended mutual fund, new shares are created . However ETF are traded between investors, you can do everything with an ETF unit which you can with a stock. example- market order,stop-loss and write put or call options.

Mutual funds are actively managed- frequent buying and selling by fund manger whereas ETF’s are passive investment. If the index changes then the ETF fund manager sells the security which has been moved out of the index and buys the one which has been included. Which basically means you will be paying less taxes and fees for ETF,
Although you will pay a brokerage commission and STT (for securities ETF) to buy or sell them.

Its better to buy stock ETF when markets are trading at lower PE something like 12 to 14.5 is good.If you are planning to do a SIP (systematic investment plan) then a good mutual fund may turnout to be a better than investing in an ETF. Basically the point is buying ETF as an SIP does not appeal to me.

ETF are easier to trade and can be bought at current NAV where as mutual funds are always bought at previous days closing NAV.

Need to maintain a DEMAT account to buy ETF, don’t need one for mutual fund.

#3 What about Gold ETF ?

Gold ETF are a good idea, its a way to own gold in electronic form traded on the exchange. You don’t have to worry about storing, purity and chase multiple jewelers to find the best price to buy / sell.
Gold ETF are based on corresponding movement between gold prices. Tax wise also it makes sense - STT is not charged for since GOLD is not “securities”. Long-term capital gains tax is applicable after 12 months from the date of purchase where as its three years in the case of physical gold. Also, unlike physical gold, investments in Gold ETFs are exempt from wealth tax.

So whats the simple idea?-So should I buy an ETF?
Multiple options are available in the market so do your research before making a firm decision.

If you cant beat Mr. Market.. join him

I am not sure, how many market pundits predicted that markets will rise 60% in such a short time.In Jan 2008, when markets hit 21k, we heard predictions like 30k or 40k but we all know what happened.

My point is that its very very hard to predict the market. A lot of self styled "experts" try to make predictions, even if they do get it right its impossible to be consistently right. I would not like to give my hard earned money to these guys.It has also been proven over the years, that even the best fund managers under perform the index over long term.

Given the above problem, how can we benefit from this -why not choose a strategy whict at least guarantees you returns which mirrors markets returns.

Index funds and ETF allow you to do just that.Refer this link for differences. Will discuss more about ETF in next post.