Monday, June 25, 2012

What are ETF's (Exchange Traded Funds) ?

Echange Traded Funds (ETFs) are funds which are listed and traded on exchanges like stocks. ETFs invest in constituents of the index in the same proportion as the index and hence it reflects index. ETFs Started in India in year 2001 by Benchmark AMC.

Few example of ETFs in Indian Stock Markets are

1. 'GSNifty Bees'  -  It tracks Top 50 Nifty companies which comes under Nifty Index.
2. 'GS Junior Bees'  -  It tracks Midcap Funds (CNX Nifty Junior Index components)
3. 'GS Gold Bees'  -  It tracks domestic Gold Price
4. 'GS HangSeng Bees'  -  It tracks Hang Seng Index of Chinese Companies
5. 'GS Bank Bees'  -  It tracks CNX Bank Index.

They are mostly passive in nature and hence the fund management is least, as it only has to reflect underlying index or underlying assest.

Benefits of ETFs
1. Easy to invest and understand
2. Least cost as it is passive in nature
3. It will give near about index based return
4. Tax efficient as long term taxes are nil.
5. Transparent Portfolio

Is investment in ETFs good for investors?
Historical data globally suggest that most of the fund managers over long period of time has not been able to beat the benchmark indices constantly as global markets are efficient so for a global investor odds are in favour of person investing in ETFs which will give decent return with reduced volatility and less risk.

However coming to Indian context there have been many funds which have beaten the index by huge margin over long period of say 15 years or more and are still outperforming the indexes so if you can select few good funds you can beat the ETFs as Indian markets are not that efficient yet. so for Indian context I would still prefer to go with your HDFC Top 200 Fund,Reliance Growth Fund, UTI Dividend Yield Fund.

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