Retail buyers are more and more investing in change traded funds (ETFs) due to low prices and returns mirroring an index. Assets underneath administration of passive funds touched Rs 5.2 trillion in March this yr, a progress of over 2.5 occasions within the final two years. Of this, Rs 4.1 trillion alone is contributed by ETFs.
Investors want to have a look at numerous elements earlier than choosing the proper ETF. For one, they need to go for the one which has excessive buying and selling volumes and good liquidity. Next, they need to take a look at the expense ratio and the monitoring error.
Select the fitting ETF
Investors want to have a look at the asset class they wish to make investments as ETFs supply publicity to fairness, debt, commodities and world equities. Once the investor has zeroed in on the asset class, say, fairness, he must determine which index—giant cap indexes corresponding to Nifty and Sensex or sectoral indices corresponding to banking or know-how—inside fairness that he desires to get entry to. Ashwin Patni, head, Products & Alternatives, Axis Mutual Fund, says as soon as the investor has recognized the index, he’ll see that there’s additionally lots of selection when it comes to a number of fund managers which may be providing an ETF for that individual index. “So depending on which fund house they want to go with they can then invest in the particular ETF,” he says.
Manish Kothari, co-founder and CEO, Zfunds, a mutual fund distribution platform, says the primary parameter ought to all the time be the volumes as even when any ETF is sweet when it comes to expense ratio and monitoring error, the excessive transaction prices of an illiquid safety will undo these constructive scores.
Consider ETF liquidity
Retail buyers should contemplate the liquidity whereas choosing the ETF. In truth, in case of big-ticket investments that are usually made by institutional buyers, they will get liquidity from the asset administration firms straight. But retail buyers who will likely be making small investments can face excessive liquidity points in ETFs having low buying and selling volumes. So, it’s going to grow to be troublesome for them to promote or get truthful market worth for his or her holdings.
Higher influence price
Lack of liquidity can result in the next influence price. For methods that lack the minimal liquidity, there’s a threat that buyers’ commerce will get executed at a worth that’s meaningfully away from the prevailing internet asset worth. “Therefore, it is important to check for minimum liquidity levels when trading. Investors can also try taking a few smaller trades or positions initially to get comfortable with the trading volumes since in some cases the liquidity may be latent because of the presence of market makers,” says Patni.
In the Indian market, there are only a few institutional buyers who take part within the ETF house. Also, it’s not a really lively marketplace for retail buyers. “This situation will definitely lead to higher impact cost for retail investors wherein they will have to bear high transaction costs due to low liquidity and will not be able to transact at fair price,” says Kothari. He suggests retail buyers ought to go together with Index Funds as a substitute of ETFs the place they won’t have to fret about liquidity and may promote anytime as per their wants.
Tax implication
The tax construction differs in keeping with the character of capital features—long-term or short-term. For fairness ETFs, capital features are thought-about as brief time period if the holding interval is lower than a yr. If the holding interval is multiple yr, then will probably be thought-about as long run. Under Section 112A of the Income Tax Act, long-term capital features as much as Rs 1 lakh is exempt from tax and any achieve over Rs 1 lakh is taxable at 10% with out indexation profit. Short-term capital features are taxed at 15% underneath Section 111A. Dividends obtained from ETFs are taxable on the relevant slab charge. Moreover, ETFs are liable to withhold tax at supply at 10% in case of residents and 20% for NRI (topic to provisions of DTAA).
For different ETFs like gold or silver, the holding interval is three years for classification of long-term features. Long-term features are taxable at 20% with indexation advantages and short-term features are taxable at relevant slab charges. Neeraj Agarwala, companion, Nangia Andersen LLP, says there are not any actual tax benefits for investing in an ETF as in comparison with different funding choices corresponding to mutual funds.
OPTING FOR ETF?
Decide on asset class, index and fund supervisor–in that order– when choosing an ETF
Retail buyers can face liquidity points in ETFs having low buying and selling volumes, thus resulting in greater influence price
Index Funds are higher as you do not need to fret about liquidity and may promote anytime
There are not any actual tax advantages in ETFs as in comparison with different funding choices corresponding to mutual funds
Source: www.financialexpress.com”
