Exchange Traded Funds (ETF's), a unique product combination of stocks
and mutual funds, are baskets of securities that tracks and replicates
various indexes (such as Nifty50, BSE Sensex, Bank Nifty, Nifty IT),
commodities (Gold and Silver) and bonds (Bharat bonds). ETF comprises
of units like mutual funds and each unit is priced through Net-Asset
Value (NAV). ETF as name suggests can be traded on NSE and BSE
exchanges like individual stocks with much simplicity and faster
execution. ETF's are often confused with Mutual funds but they both
are different investment products.
ETF's are schemes/funds
wherein many small and large investors invest their money passively
and fund manager buys stock replicating benchmark indices such as
NIFTY. ETF's may or may not outperform their benchmark indices but
delivers returns in line with indices with some tracking error.
India launched its first ETF “Nifty Bees” in January 2022 which
is listed in stock exchanges and can be traded like any other stocks.
In last few years, there has been rush towards passive investment
tools for retail investors. Currently, salaried professional and even
regular investor wants to invest their savings into equities or gold
through SIP's rather than traditional FD's. According to data, AUM of
ETF assets in India touch 6.5 trillion in November.
ETF
offers investors to earn market linked returns while eliminating
behavioral and individual risks. Systematic Investing through
Systematic Investment Plans (SIP's) in Nifty50 Index ETF's such as
NIFTYBEES or lump sum investment during corrections would be an added
advantage to your increase returns through passive investing strategy.
It is noticed that majority of actively managed funds underperforms
market and investors ends up paying higher management fees for
underperforming investing while ETF's are very low cost product in
terms of expense ratio. ETFs/Index funds overcome many behavioral and
emotional risks which individual investor would encounter while
investing. Let's take a look at Nifty BEES Vs. Nifty 50 Index returns
from January 01st 2011 to December 26th 2022. Calendar year i.e. 01
Jan – 31st Dec is considered while calculating return:
2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|---|---|---|---|---|---|
Nippon India ETF Nifty Bees | -24.03% | 26.49% | 7.23% | 31.57% | -4.26% | 3.97% | 29.89% | 4.82% | 13.62% | 15.42% | 25.97% | 5.03% |
Nifty 50 Index Returns | -24.62% | 27.70% | 6.76% | 31.39% | -4.06% | 3.01% | 28.64% | 3.16% | 12.02% | 14.90% | 24.12% | 3.80% |
We can clearly analyze Nifty Bees Outperformance over long term.
Let's say if investor has invested ₹ 100,000 in Nifty Bees on January 1st, 2011, his/her invested amount as on December 27, 2022 would amount to ₹ 318,793.30 excluding dividend giving 3x return in 12 years with CAGR of 10.14%. While ETF are passive investment tool but its applications are far reaching. ETF provides efficient trading exposure to investors who prefer to invest in specific sectors, index or asset class. Sometimes investors await right market condition for investment in individual stocks and till then ETF serves as right product to park investor's money helping to manage cash flows. ETF also serves as diversifying tool for investors with minimal capital. Thus, Exchange Traded Funds best suited for investors who wants a wet their feet into equities at lower cost and lower risk as compared to individual stocks.
Disclaimer: This article has been written by Jay Patel - Our Senior Research Analyst and originally published on Smart Investment website.