How do ETFs work?
ETFs follow a passive investment strategy wherein fund managers don't use discretion in designing the investment portfolio. Instead, they replicate the composition of the underlying index with similar constituents in the same weightage as the underlying index. Hence, ETFs will mirror the underlying index's return. However, tracking errors and scheme expenses also affect returns.
What are the Benefits of investing in ETFs?
Mitigation of Unsystematic Risk - ETFs help eliminate the unsystematic risk, as the fund managers cannot take any specific investment calls. They only need to track the changes in the underlying index.
Low-Cost Investment Product - Since ETFs follow a passive investment strategy, fund management charges towards such funds are lower, resulting in an overall low Total Expense Ratio (TER). As such, ETFs emerge as a low-cost investment product for investors.
No Lock-in Period - The investors can liquidate their investments by placing a sell order through the stock exchanges at any time during the trading hours.
Who Should Invest in ETFs?
Investors willing to have similar investment exposure to benchmark indices may need to invest in the same stocks constituting the indices. Moreover, they also need to opt for equivalent weights to replicate the index returns. Instead, they may consider investing in exchange traded funds to fulfil their investment objective with a single investment product.
What are Gold ETFs?
Gold ETFs are investment products traded on stock exchanges. The investment portfolio provides returns in sync with the movements in international gold prices. Investing in gold ETF is a digital method of investing in gold while eliminating the impurity risk and storage costs generally associated with physical gold investments.
| Particulars | Period of Holding | Tax rate |
|---|---|---|
|
Capital Gains on Equity Index ETFs Short Term Capital Gains (STCG) Long Term Capital Gains (LTCG) |
Less than 12 months 12 months or more |
15% 10% without indexation benefit* |
|
Capital Gains on Gold ETFs Short Term Capital Gains (STCG) Long Term Capital Gains (LTCG) |
Less than 36 months 36 months or more |
Regular tax rates applicable to the investor 20% with indexation benefit |
Are there any tax advantages of ETF?
ETFs taxation policies are in line with other mutual fund schemes, depending upon the portfolio composition of such funds. As such, equity ETFs are taxed as per the tax provisions applicable to equity-oriented funds. On the other hand, gold ETFs are taxed as per the tax rates applicable to the funds other than equity-oriented funds.
Who should invest in exchange traded funds?
Benchmark indices are not a security or investment product by themselves. Investors willing to have similar investment exposure as a market index, with a single investment product, may consider investing in ETFs.
How to invest in exchange traded funds
One can invest in ETFs through demat trading accounts and buy ETF units on stock exchanges. Such orders can be
placed as market order or limit order. The buyer's order will be executed at the best available sell order for
the
ETF units in a market order.
In contrast, a limit order means that the buyer has specified the maximum buying price and whenever there is a
sell order on or below that price, it will get executed. If there is no such order till the end of the day, the
order gets automatically cancelled.
What is tracking error?
There may be a time lag between changes taking effect in the index and the changes getting mirrored in the investment portfolio. This results in tracking error, i.e., a difference in the scheme returns and that of the underlying index.
What are the types of exchange traded funds?
The most common types of ETFs are:
- Gold ETFs - It tracks the domestic physical gold price.
- Nifty ETFs - It tracks an nifty index such as nifty 50, nifty next 50, etc.
- Bank ETFs - It tracks the index that contains only banks.
Disclaimers:
The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. In view of the individual nature of the tax consequences, each investor is advised to consult his or her or their own tax consultant with respect to specific tax implications arising out of their participation in the Scheme. Income Tax benefits to the mutual fund & to the unit holder is in accordance with the prevailing tax laws/finance bill 2020. Any action taken by you on the basis of the information contained herein is not intended as on offer or solicitation for the purchase and sales of any schemes of UTI Mutual Fund. Please read the full details provided in SID and SIA carefully before taking any decision.
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