NIFTY Exchange Traded Fund
- 5m0•
- 08 Feb 2023
Nifty 50 Index is the benchmark index on the National Stock Exchange and includes the 50 most liquid stocks of the largest companies in the market.
What Are Nifty ETFs
Nifty ETFs — or exchange traded funds — invest in stocks that are a part of the Nifty 50 Index.
Its main objective is to try and replicate the performance of the index by buying the same stocks in the same proportion as they are in the index.
Why Invest In Nifty ETFs
- Limited risk: Nifty ETFs invest in blue-chip stocks on the Nifty Index. Blue-chip stocks belong to the largest companies in the country. The common wisdom is that blue-chip companies offer stable returns over the long-term and also provide security from market volatility.
The ICICI Prudential Nifty ETF, for example, has invested roughly three-fifth of its assets on the following ten companies:
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Cheaper option: Investors have the option of buying individual blue-chip stocks. But buying solo can be an expensive affair. For example, the price of one Reliance Industries stock is above Rs 1,100, while an HDFC stock trades above the Rs 2,000 level. Therefore, buying stocks of all the 50 companies can drill a hole in your pocket. Nifty ETFs, on the other hand, allows investors to put their money in blue-chip companies in a cost-efficient manner.
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No research required: Most people stay away from the stock markets due to a lack of knowledge. However, Nifty ETFs don’t require any research because they simply buy the stocks that are present in the Nifty 50 Index. Moreover, investors benefit from the Nifty Index’s policy of replacement. Only those companies performing get to remain in the index. Those who don’t are shown the door, with better performing companies taking their place.
Advantages Of Nifty ETFs
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Simple to understand: Unlike mutual funds where investors depend on the expertise of fund managers, Nifty ETFs have no bias, no judgement while buying stocks — it simply buys stocks that are present in the Nifty.
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Instant diversification: The Nifty Index consists of the 50 most valuable stocks spanning more than a dozen sectors of the Indian economy. Therefore, investing in Nifty ETFs gives investors diversification, which is important because it reduces the risk factor. Some of the sectors that are covered by ICICI Prudential Nifty ETF include:
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Software
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Petroleum products
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Consumer non-durables
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Finance
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Auto
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Construction project
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Pharmaceuticals
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Power
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Ferrous metals
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For instance, let’s assume that IT and pharmaceutical sectors are underperforming. In this case, the investor can still rely on the remaining sectors to offset the losses.
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High liquidity: Nifty ETFs prices are updated throughout the day, which allows investors to trade them at any time of the day. On the other hand, mutual fund prices are updated at the end of the day, compelling investors to give their buy or sell order without knowing the real-time value of the fund.
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Easy on the pocket: Nifty ETFs are passively managed. In simple words, fund managers don’t have to rely on their research to pick the right stocks. All they need to do is ensure that the ETF has bought the Nifty stocks in the right proportion. That’s the reason why the expense ratio is the lowest among all mutual funds. For example, the ICICI Prudential Nifty ETF has an expense ratio of just 0.05% per annum. Lastly, the Nifty ETF doesn’t have a ‘load’ scheme for joining or leaving the fund.
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Stable returns: Since Nifty ETFs invest in blue-chip companies, these funds suit investors who are looking to invest for the long haul but with limited risks. For instance, ICICI Prudential Nifty ETF has delivered 10.34% returns (for SIP investors) and 12.59% (for lumps investors) since its inception in March 2013. There is a slight variance in the delivery model because SIP returns are calculated by XIRR approach and the lumps returns are in CAGR.
| Period | Scheme (SIP) | Nifty 50 (SIP) | Scheme (lumpsum) | Nifty 50 (lumpsum) |
|---|---|---|---|---|
1 year | 4.36% | 4.52% | 7.69% | 7.82% |
3 years | 12.29% | 12.41% | 12.41% | 12.54% |
5 years | 11.03% | 11.14% | 13.21% | 13.37% |
7 years | NA | 12.36% | NA | 13.69% |
10 years | NA | 12.03% | NA | 16.10% |
Since inception | 11.68% | 11.80% | 13.31% | 13.47% |
Note: For lumpsum performance, returns less than 1year is in Absolute terms, greater than 1year is in CAGR terms. For SIP performance, the returns are calculated by XIRR approach assuming SIP investment of Rs 10,000 on the 1st working day of every month in the Scheme. XIRR helps in calculating return on investments given an initial and final value and a series of cash inflows and outflows with the correct allowance for the time impact of the transactions. The performance of the scheme is benchmarked to the Total Return variant of the Index. Past Performance may or may not be sustained in the future.
Differences Between Mutual Funds And Exchange-Traded Funds
| Parameter | Mutual Fund (MF) | Exchange-Traded Fund (ETF) |
|---|---|---|
Definition | An MF is a professionally managed investment tool which involves the collection of resources from multiple investors. | An ETF is an investment scheme that tracks a specific index. ETFs are listed and traded on a stock exchange. |
Disclosure of holdings | MFs are required to disclose their asset holdings on a quarterly basis. | For ETFs, the disclosure of holdings is done on a daily basis. This ensures greater transparency. |
Fractional shares | MF investors can buy fractional shares-that is, less than one share of a stock, such as half a share or a third of a share. | Fractional shares are not available to ETF investors. |
Share price | MF units are traded only once at the end of the trading day. That is why MF values do not keep shifting. | The prices of ETF shares fluctuate throughout the day as the shares are traded on the stock exchange. |
Transaction price | In MFs, fund units are traded at the Net Asset Value (NAV), which is calculated when the trading day ends. | In ETFs, the funds are traded on the quoted market price, similar to the trade in stocks. |
Transaction process | To buy or sell MF units, the investor has to place a request with the fund house. | ETFs can be freely traded within market hours at the investor's convenience. |
Taxation | 15% short-term capital gains (STCG) tax applies to equity MFs held for less than a year. Long-term capital gains tax (LTCG) of 10% applies to returns of more than Rs 1 lakh on equity MFs. LTCG under Rs 1 lakh are tax-free. | ETF returns enjoy the LTCG tax benefit only if held for more than three years. Otherwise, the STCG tax applies. |
Trading account | You don't need a trading account to invest in MFs. | You need a trading account to start investing in ETFs. |
Management | MFs need active managers for assets to perform. | ETFs don't need active managers. The management here is passive since the ETF needs to match a specific index. |
Fees and commissions | Fund management fees may be high as MFs require the fund manager to take active decisions. However, no commissions are charged for buying and selling MF units. | Fees tend to be lower as an ETF tracks a specified index and does not need active management. But, like with stocks, investors may need to pay commissions when trading ETF units. |
Lock-in period | Some MFs like the Equity-Linked Savings Scheme (ELSS) come with a three-year lock-in period. | There is no minimum holding period for ETFs. |
Top Performing ETFs
Let the numbers speak for themselves! Here are the top 3 NIFTY-benchmarked ETFs ** with regular 3 year returns:
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Edelweiss Exchange Traded Fund-Nifty 50 – 16.15%
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UTI Nifty Exchange Traded Fund – 15.71%
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SBI ETF Nifty 50 – 15.68%
The 3-year benchmark return for the ETFs above is 15.73%
source: https://www.amfiindia.com
** 3 year average return of regular schemes as of 2nd December 2019.
** Past performance is not indicative of future results.
Securities mentioned are exemplary and not recommendatory
How Is The Nifty ETF Priced?
Let’s explain with the example of the above mentioned ETF. One unit of the ICICI Prudential Nifty ETF is 1/100th of the Nifty index. It basically means that if Nifty is trading around 11,500, the value of a single unit would be Rs 115, depending on demand and supply.
As on October 31, 2018, the value of a single unit stood at Rs 107.99.
If you are an investor and want to invest in Large Cap index for the long-term, a Nifty ETF may be right for you. Please note past performance is no guarantee to future performance though.
If you are a cautious investor and want to invest for the long-term, a Nifty ETF may just be the right fit for you.
