Introduction to

Exchange
Traded Funds
(ETFs)
 Disclaimer
 Information contained in this presentation is as on May 09, 2022.

 The information contained in this presentation is only for

Educational and Awareness Purposes related to securities market .

 This presentation is only for Educational and Investor Awareness

Programs and shall not be used for any legal interpretations.

 SEBI or Stock Exchanges or Depositories shall not be responsible

for any damage or loss to any one of any manner from use of this
material.

 Suggestions or feedbacks, if any, may please be sent by mail to

[email protected].

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 Flow of Presentation
1. What are ETFs? - Overview;
2. Advantages of investing in ETFs;
3. Difference between ETFs, Stocks & MFs;
4. Types of ETFs;
5. How to apply for ETFs – during NFO;
6. How to invest in ETFs at SEs (Post closure of NFO);
7. iNAV and Market / Traded price of ETF;
8. Redemption of ETF units by AMC;
9. Buying ETFs directly from AMC (Bulk deal);
10. Tax on ETF Trades, etc.;
11. Points to ponder before investing.
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 What are ETFs? Overview

ETF are like diversified mutual funds that are listed

and traded on the stock exchange

Operationally are like Mutual Fund

Trade like Shares

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 What are ETFs? Overview

 Funds collected by ETF are invested in securities (debt/equity)/assets

(gold/silver) which forms part of an Index/Asset Class.

 ETFs try to follow or replicate the performance of benchmark index

 Objective of ETF is to track the returns of a particular Index, viz.

Nifty 50 or Sensex 30,

 It will invest in the securities which are part of Nifty 50 or Sensex 30

in the same proportion as that of the index.

 Holder of ETF units gets exposure similar to that of buying shares of the
Index

 Thereby ETF holder gets benefits of diversification at a lower cost.

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 What are ETFs? Overview
 Investment style of ETF units is called Passive Investing.
 What is Active Investing Vs. Passive Investing.
 Active Investing -
 Fund manager invest and tracks returns of the selected securities (Stock
picking based on analysis and judgement).
 Main purpose of fund is to beat benchmark index.
 To get Alfa Returns (i.e. To get returns above benchmark index).
 Rely on professional fund managers who manage investments.

 Passive Investing -
 Fund manager invest in the securities which are part of Index (No stock
picking).
 Main aim of fund is to replicate or follow the returns of Index by making
investment in the same proportion as that of the index.
 To replicate the return of the benchmark index by minimizing the
tracking error.
 No Active fund management required.
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 Investing in ETFs

 Like a fund…  Like a stock…

• Constructed to track an index • Trading flexibility intraday on the

exchange
• Open ended mutual fund

• Lower expense ratio generally • Real time price

as compared to an active fund • Put limit orders

• Lower turnover • Minimum trading lot is just 1 unit

• More transparent • Delivery into your Demat account

Index Fund Stocks

ETF
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 Advantages of ETFs

Investors in ETFs can benefit both the flexibility of a stock as

well as the diversification

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 Difference between ETFs, Stocks & Mutual Funds
Functionality ETFs Stocks MF
Units
 Real time trading & pricing throughout market
hours
 Can be purchased through brokers and /or
online trading a/c
 Can be traded real time on the Exchange
platform
 Is Diversification possible with a single unit

 Returns at par with the market / Index (subject

to applicable fees and expenses)

 Paper less investing

 Exit Load

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 Types of ETFs

Equity /
Index ETFs Gold / Silver
ETFs

Global
Debt ETFs
Equity ETFs

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 Equity ETFs

 Equity ETFs are exchange-traded funds that seek to replicate and track a
benchmark index like SENSEX, NIFTY, etc., as closely as possible;

 Equity ETFs offers instant diversification in a tax efficient and cost effective
investment.

 The price fluctuations in Equity ETFs are directly linked to the index it
follows,

 Equity ETF returns are not exactly the same as the benchmark index due to
tracking error.

 Tacking error is the annualized standard deviation of the difference in

daily returns between the underlying Index/goods and the NAV of the
ETF calculated on a rolling basis.

 The Lower the tracking error means, more is the accurate replicating of the
index .
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 Gold ETFs

 Gold ETF aims to track the physical gold price.

 Gold ETFs are units representing physical gold.

 Gold ETFs – Having flexibility of stock investment and the

simplicity of gold investments.

 Buying an Gold ETFs means an Investor is purchasing

Gold in an electronic form.

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 Debt ETFs & Global Equity ETFs

 Debt ETF -

 Debt ETFs invest according to specific Debt Index.

 Debt ETFs also tracks different fixed income securities

depending on an underlying fixed income index like Nifty
8-13 years G-Sec Index or NIFTY 4-8 years G-Sec Index.

 Global Equity ETF -

 Allow the investors to take an exposure to international

indices.

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 How to invest in ETFs?

 Investor need to have three accounts

Trading Demat
Bank Account Account
Account with Brokers with DPs

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 How to invest in ETFs?
NFO On going offer

Buy/Sell
Investor Stock Exchanges
Buy/Sell

Subscription

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 How to invest in ETFs

 During New Fund Offer (NFO) -

 ₹ 500/- or such other minimum amount

 Post Closure of Fund Offer, Ongoing Basis -

 On the Exchange :
1 Unit & in multiples thereof

 Directly with Fund :

Large investors can directly purchase the units from the

AMC in stead of buying from exchange

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 How to apply for ETFs-during NFO

 How to Apply:

 ETF Units available only in dematerialized (electronic) mode.

 Beneficiary account with a Depository Participant of

NSDL/CDSL.

 Following details to be indicated in the application form :

 Depository Participant’s name,

 Depository Participant’s ID Number,

 Beneficiary account number of the applicant with DP.

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 How to apply for ETFs-during NFO

 Allotment:

 Intimation of allotment sent within five days from date of

allotment.

 ETF Units are credited in DP account.

 Listing:

 Listing of ETF units on the Stock Exchanges.

 within 5 working days from the date of allotment.

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 How to invest in ETFs at Stock Exchange
(Post close of NFO)
 Buy / Sell ETF units at stock exchange -
 Similar to buy / sell of shares in Secondary market.
 Investor need to place buy / sell order with stock broker.
 Investors can buy or sell at stock exchange post listing of ETF units .
 Minimum number of units for buy / sell : 1 (one) unit.

 Settlement of trades in ETF -

 Buying of ETF units -

o Payment of funds before the funds pay-in day of the settlement
cycle.
o ETF units get credited in investor’s demat account after pay-out
day.

 Selling of ETF units -

o Delivery of ETF units to broker before securities pay-in day.
o Payment gets credited in investor’s bank account after pay-out day.
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 iNAV and Market /Traded price of ETF

 Net Asset Value (NAV) of ETF -

 Value of each unit of ETF calculated by AMC of ETF.

 Market Price / Traded price of ETF -

 Price at which ETF units brought / sold at stock exchange.
 Price of ETF changes, based on market demand or supply of ETF.
o Price increase, if there are more buyers of ETF.
o Price decrease, if there are more sellers of ETF.

 Market price is premium / discount if traded price is more /less than NAV.

 What is iNAV (Indicative NAV)

 iNAV reported every 10-15 sec on the website of MF AMC during market
hours. Currently, iNAV for Gols and Silver ETFs are also available on
Exchange Platform.
 Before buying or selling decision, check iNAV of ETF units.

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 iNAV and Market /Traded price of ETF
Real Time Pricing
Live Quotes on Exchange site Real Time NAV on AMC site

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 Redemption of ETF Units by AMC

 In Normal case, Investor need to sell ETF units at Exchange through trading
account.

 However, investors can directly approach AMC for redemption of ETF units,
subject to the following conditions:

a) Traded price of the ETF units -

 is at discount of more than 3% to NAV for continuous 30 days.

a) Bid price quoted at exchange -

 is at discount of more than 3% NAV for 7 consecutive days.

 No quotes are available on exchange for 3 consecutive trading days.

 Total bid size on the Exchange is less than half of Creation Units Size
daily, averaged over a period of 7 consecutive trading days.

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 Buying ETFs directly from AMC (Bulk deal)
Applicable to Investors having large funds:
 Investors willing to buy ETFs in bulk may deal with AMCs directly.
 This facility is not suitable for small investors.
 Creation of ETF units is defined for every ETF and displayed on the AMC
website.
 Creation Unit is a fixed number of ETF units, which is exchanged for a basket
of shares underlying the index called the "Portfolio Deposit" and a "Cash
Component".
 For e.g. to subscribe 10,000 units of an ETF with the Fund.
 Investor need to deposit a pre-defined underlying portfolio and the cash
component.
 In exchange of this portfolio and payment of a "cash component",
 Investor is allotted 10,000 units.
 This "in-kind" exchange of underlying portfolio for units is a unique
feature of ETFs.
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 Tax on ETF Trades

 Tax Structure on Capital Gains on Equity ETFs:

 Short-term capital gains are taxed at 15% along with surcharge and
other Cesses as applicable.
 For all long-term capital gains, an amount of up to ₹1 lakh is tax-
deductible, and a tax of 10% would be levied on any amount greater
than ₹1 lakh without indexation benefits.
 Tax Structure on Capital Gains on Gold, Debt and Other ETFs:
 Long-term capital gains tax of 20% plus cess with indexation benefits, if
held for more than 36 months.
 Short-term capital gains tax: As per the income-tax slab rate of the
investor.
 Securities transaction tax (STT):
 If you buy ETFs there is no securities transaction tax (STT), but when
you sell then STT is applicable.

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 Points to Ponder before investing
 Underlying Index: Investors need to first decide on the market in which
they wish to invest, i.e. Benchmark Index as a whole or a Specific Sectoral
Index Gold/ Silver, etc.  iNAV: Before buying or selling
1 decision, check iNAV of ETF units.
 Total Expense Ration (TER):
Different funds tracking the 3  Tracking Error : ETFs
same index can have different 2 must closely track the
expense ratios (annual fee a benchmark. An ETF with
fund charges to cover its lower tracking error to its
expenses). benchmark should be
preferred to others.

 Liquidity: When considering ETFs, other than TER and Tracking Error,
liquidity is also very important. One should prefer ETFs with greater
liquidity.
 Assets Under Management (AUM) of an ETF is calculated by multiplying
the shares outstanding by the market price per share. ETFs with greater
AUM tend to have more liquidity.
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 Additional Information
 For further information, you may visit the following web-sites
and Mobile App:
 w w w. s e b i . g o v. i n /
 h t t p s : / / i n ve s t o r. s e b i . g o v. i n /
 Saa₹thi App
 For Grievance Redressal, you may visit following website:
 w w w. s c o r e s . g o v. i n /
Or, you may call SEBI at following Toll-free Helpline Numbers
from 9:00am to 6:00pm on all days (excluding declared holidays in
the state of Maharashtra):
Helplines are available in 8 Languages:
 1 8 0 0 2 6 6 75 75 English, Hindi, Bengali, Gujarati, Marathi,
Kannada, Telugu and Tamil
 1 8 0 0 2 2 75 75
SEBI : HAR INVESTOR KI TAAQAT 26
THANK YOU

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