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  1. How to invest in stock markets: Should you invest in equity mutual funds or ETFs? 5 special steps to profit for you

How to invest in stock markets: Should you invest in equity mutual funds or ETFs? 5 special steps to profit for you

The Centre has set itself a divestment target of Rs 72,500 crore for this financial year. As part of the process, we’ve seen two exchange traded funds (ETFs) being launched.

By: | Published: December 18, 2017 1:54 AM
The Centre has set itself a divestment target of Rs 72,500 crore for this financial year. As part of the process, we’ve seen two exchange traded funds (ETFs) being launched.

The Centre has set itself a divestment target of Rs 72,500 crore for this financial year. As part of the process, we’ve seen two exchange traded funds (ETFs) being launched. The second tranche of the CPSE ETF was announced earlier this year, while more recently we have had the Bharat 22 ETF hit the market. The two contain stocks of some leading PSUs. What are the various ways in which these ETFs are different from equity mutual funds?

Portfolio

For both ETFs, the underlying assets are stocks in some of India’s biggest companies. The CPSE ETF contains 10 maharatnas and navratnas focusing mainly on the energy sector. The Bharat-22 comprises stocks of 22 blue-chip public sector units, state-owned banks and some holdings in SUUTI. These companies are the giants of corporate India and are core to the Indian economy. In comparison, an equity mutual fund could follow this theme or any other. They may invest in large-cap companies, or in micro-cap ones, or any firm between those two extremes or even a mix of all these.

Fund management

An ETF is a collection of funds based on a market index. It is composed in the same manner and proportion of stocks in which the index is formed. The ETF tracks the index’s performance and is not actively managed. An equity mutual fund is actively managed as the fund manager decides which stocks to buy, hold, and sell. There is a lot of churn in the portfolio in order to offer the best possible returns.

Returns

In the CPSE and Bharat 22 ETFs, the underlying stocks are of corporate giants that will offer moderate returns. Therefore, the risks are lower. As of December 14, the CPSE ETF has a three-year CAGR of 6.94%, and one-year returns of 16.54%. Bharat 22’s returns are currently in the red after its recent launch. As such, long-term returns from equity investments in large-cap companies have outperformed small savings schemes, fixed deposits, and even gold. However, you can’t expect ETFs to provide explosive growth. In comparison, equity mutual funds don’t always have such restrictions. For example, many mid- and small-cap funds have returned between 30-50% in the last 12 months. The higher risks you take, the better returns you could earn.

Expense ratio

One of the best features of ETF investing is the negligible expense ratio. The Bharat22 ETF has an expense ratio of 0.0095% per year for three years, after which it can potentially change. The CPSE ETF on the other hand is around six basis points. In comparison, the expense ratio for a typical equity fund is 0.5-3%. Also, when you invest in a direct plan, expense ratio can come down by 90-100 basis points.

How to buy & sell

To buy CPSE and Bharat 22 ETFs—or any ETF—you need a demat trading account. The ETFs can be purchased off the stock market  directly as per the prevalent price, and also sold similarly. There are no entry and exit loads. To buy mutual funds, you don’t need a demat  account. You can buy them directly from the AMC by registering online, or via fund  aggregators also by registering online. Mutual funds can be sold instantly, barring ELSS  funds that have a three-year lock-in. Check
for exit loads before deciding when to sell  your funds.

PSU ETFs help you privately own a chunk of some of India’s most iconic companies—ones that are critical to the Indian economy. They may be able to deliver stably while providing you moderate returns. However, as an equity investor, you should look to diversify beyond large-cap funds in order to generate higher returns. This can be done through the larger basket of the equity mutual funds available today.

The writer is CEO, BankBazaar.com

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