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​Sensex ETF​

Exchange Traded Funds (ETF) are passively managed fundsthat track a benchmark index such as S&P BSE Sensex TRI, Nifty 50 TRI, etc. Essentially, an ETF constructs a portfolio that is similar to the index as a whole, subject to expense ratio and tracking error.Their goal differs from that of actively managed funds, in which they don’t try to outperform the benchmark index. Their focus is on maintaining low tracking error, which is a standard deviation of the difference between the returns of the ETF and the benchmark index over a period of time. Therefore, when you invest in an ETF, you’ll generate returns similar to that of its underlying index, subject to expense ratio and tracking error.

Types of ETFs


1. Equity ETF

An Equity ETF invests in a basket of stocks identical to a particular index such as S&P BSE Sensex, Nifty 50, Nifty Bank, etc. An Equity ETF is suitable for investors who want to investpassively into the Indian stock market while keeping their costs low.

2. Commodity ETF

Presently, under a commodity ETF segment, only Gold is a permissible commodity. A Gold ETF tracks the price of domestic physical gold. It also allows investors to invest in gold in paper form. Gold ETFs are a more efficient way of investing in gold since you don’t pay making charges like you would on physical gold jewelry.

3. Fixed Income ETF

A Fixed Income ETF tracks an index of bonds, State Development Loans (SDLs), G-Secs, etc. such as the Nifty 5 Yr Benchmark G-Sec Index.Fixed Income ETFs aren’t as popular as the other two categories in India. However, a Fixed Income ETF does offer a low-cost alternative for investing in bonds, SDLs, G-Secs, etc.


Sensex ETF

A Sensex ETF, as the name suggests, tracks theS&P BSE Sensex TRI. The portfolio of a Sensex ETF is composed of a basket of stocks that represents the S&P BSE Sensex Index. The index tracks 30 well-established, large cap companies listed on the Bombay Stock Exchange. Therefore, a Sensex ETF will hold all 30 stocks in a similar proportion to the underlying index, i.e. S&P BSE Sensex.


Advantages of Investing in Sensex ETF

1.  Exposure to Large Caps

By investing in Sensex ETF, an investor gets exposure to the top 30* large cap companies traded on the Bombay Stock Exchange.

*As per Index Methodology

2. Low cost

At the core of an ETF’s value proposition is a low expense ratio. Actively managed funds have relatively high expense ratios since the fees of the fund manager and other stock research related operations are charged against the scheme’s returns. Since ETFs are passively managed,their expense ratio is significantly lower.

3.  Traded on Exchange

Unlike other mutual funds, ETFs are traded on the exchange. ETFs are open-ended schemes and have no lock-in period. Collectively, these factors allow investors to purchase or redeem their holdings, similar to any other stock on the stock exchange. You can trade ETFs at the prevailing market prices in the stock exchange hours, just like any other stock.

4.  Risk Management

Investing in actively managed funds requires you to understand the fund’s risk profile, the fund manager’s style, and past performance. Investing in ETFs, on the other hand, reduces the non-systematic risks like stock picking or portfolio manager selection.


Disadvantages of Sensex ETFs

1.  Tracking error

ETF returns don’t deliver the exact returns as that of the index. It is fundamentally impossible to deliver exact returns because an ETF holds some cash to pay for administrative and other expenses, while the index doesn’t hold any cash.

2. Low trading volume

Not all ETFs available on the Indian exchanges have a high trading volume. ETFs with a low trading volume have a high bid-ask spread. For example,when a seller is ready to sell their units for a price lower than what a buyer is ready to pay for it, the difference is known as a bid-ask spread. If you end up investing in an ETF with a low trading volume, you may find it hard to redeem your units at the desired price.

Bottom Line

ETFs area great, low-cost option of investment for passive investors who want to stay invested for a long time.If you plan on adopting a passive investment strategy, invest in an ETF directly or consult your financial advisor about investing in an ETF, if you need help from an expert.


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Disclaimer:
This is an investor education and awareness initiative by Nippon India Mutual Fund.
Helpful information for investors: All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/ Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in . For more info on KYC, change in various details & redressal of complaints, visit mf.nipponindiaim.com/investoreducation/what-to-know-when-investing This is an investor education and awareness initiative by Nippon India Mutual Fund.

The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document. Language Disclaimer:
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