ETFs (Exchange Traded Funds) are passive investment vehicles. They provide direct investment exposure to underlying indexes or commodities such as silver, gold, etc. The Securities and Exchange Board of India (SEBI) requires an ETF to invest at least 95% of its assets in securities in the underlying index.
Before answering the question, "What are the numerous types of ETFs one may invest in?" it's important to know that ETFs offer several advantages to investors. They include portfolio diversification, ease of investing, ease of understanding, and the potential reduction of unsystematic hazards. ETFs like Gold ETFs developed as a low-cost investment option for investors seeking a streamlined method of investing in more significant markets.
If you're curious about how many different types of ETFs there are, here's a list of some of the most common:
Equity ETFs
Equity ETFs, as the name implies, track an underlying broad market equity index such as the S&P BSE Sensex, NSE Nifty50, NSE Nifty Next50, or sectoral/thematic indices such as Nifty Bank, Nifty Auto, CPSE, or strategy of factor-based equity indices such as Nifty 200 Momentum 20, Nifty Midcap Quality, or Nifty Low Volatility. According to the chosen scheme, investors directly have exposure to the particular equity market index.
These equity ETFs can alternatively be classified as domestic or foreign equity ETFs. Domestic equities ETFs track domestic equity indices, whereas international equity ETFs invest in global equity shares that are part of international stock indices. One can choose between numerous available ETFs per their risk tolerance, investment horizon and financial goals.
Debt ETFs
These ETFs invest in debt indices such as gilt indices, money market indices, and so on. Such ETFs are designed to meet the debt allocation requirements of an investment portfolio. One can also use such debt ETFs to create a maturity basket of debt ETFs maturing in different years. When investors retain such target maturity ETFs until maturity, the interest rate risk on such ETFs is reduced, and investors can target the yields available at the time of investment.
Commodity ETFs
These ETFs invest in physical commodities such as gold and silver. One of the most popular options here is Gold ETFs. As such, the investors can have direct exposure to investing in things without worrying about the physical storage and security of such commodity stock.
Because commodity ETFs' investment portfolios include actual stock, fluctuations in commodity prices are reflected in ETF portfolio valuation changes. Investors often utilise commodity ETFs like Gold ETF Funds to diversify their investment portfolios into multiple asset types.
Purchasing ETFs
Like ordinary equity shares, ETF units can be traded on stock markets. Consider investing in an ETF with a higher stock exchange trading volume. Increased liquidity for ETF units gives investors a better chance of executing trades on stock exchanges with lower impact costs. Furthermore, mutual fund houses may operate as market makers for ETF units to generate liquidity for investors on stock exchanges.
Taxation of gains from ETF units
The returns generated by investors on selling ETF units are taxed as Capital Gains under Income Tax Regulations. Depending on the ETF investing pattern and holding length of such units, such gains may be characterised as short-term or long-term.
Equity ETFs (except international equity ETFs) are taxed like equity-oriented funds, while international equity ETFs, debt ETFs and commodity ETFs like gold mutual funds are taxed as non-equity-oriented funds. The summary of the tax rates applicable is given below:
|
Type of ETF |
Holding Period for Investment |
Type of Capital Gains |
Taxation Rate |
|
Equity-oriented ETF |
Less than 12 months |
Short-Term Capital Gain (STCG) |
15% |
|
12 months or more |
Long-Term Capital Gain (LTCG) |
10% after an exemption of Rs. 1 lakh for LTCG from equity shares and equity funds in aggregate in a financial year |
|
|
Other than equity-oriented ETF |
Less than 36 months |
STCG |
Regular tax rates |
|
36 months or more |
LTCG |
20% with indexation |
Conclusion
ETFs, combine the steadiness of a mutual fund with the efficiency of stock market investments. They don't tie your returns to the success of a particular firm or asset. They also allow you to change your assets quickly if one asset is underperforming. Many of these advantages make ETFs like Gold ETF an appealing investment option for you. Thus, begin your ETF study and select the one that best fits your financial goals.
Disclaimer: Mutual Funds are subject to market risks. Please read all scheme-related documents carefully before investing.
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