In India we have 5 types of ETFs- Equity, Debt, Gold, Global and Smart beta.

• Equity ETFs are passive investment instruments that are based on indices and invest in securities in same proportion as the underlying index

• Debt ETFs like equity ETFs, Debt ETFs offer exposure to a basket of securities that, in this case, is a basket of bonds and other debt products.

• Gold ETFs are instruments that are based on gold prices and invest in gold bullion. Because of its direct gold pricing, there is a complete transparency on the holdings of an ETF.

• Global ETFs invests mainly in foreign based securities. These ETFs may track global markets or track a country-specific benchmark index.

• Smart Beta ETFs are comprised of a list of stocks that are selected based on criteria. The criteria is often a factor or a combination of factors like low volatility, value, quality or momentum. For example, a Nifty Smart Beta ETF with a focus on low volatility would comprise of stocks within the 50-stock index that are relatively less volatile than their peers.

All ETFs mimic the composition of the market index they track. This is a passive style of investing and hence carries low risk and low costs. An investor who wants to benefit from the growth potential of a certain market index can choose to do so through a scheme that invests in the same securities as that market index.

Net asset value (NAV)
Like a mutual fund, an ETF also has an end of the day Net Asset Value (NAV).NAV tells you the total value of all the fund’s assets and yours. An ETF trades real-time, whereas NAVs are only announced at the end of the day. So how do you figure out if the price you are paying for an ETF is fair in real-time?
Check iNAV
Intraday or indicative net asset value (iNAV)
Given that ETFs trade real-time, you need a reference point to see if the market price you see on your trading platform is a fair one and the indicative or intraday NAV (iNAV) serves as that reference. AMCs usually calculate this every 10-15 seconds and publish it on their websites. This serves as a real-time NAV so that you can use this as a fair value reference to compare it with the current market price on the stock exchanges.

While the expense ratio of ETFs is generally low, there are certain costs that are unique to ETFs. Since ETFs, like stocks, are bought as shares through a broker, every time an investor makes a purchase, he/she pays a brokerage commission. In addition, an investor can suffer the usual costs of trading stocks, including differences in the ask-bid spread etc. Of course, traditional mutual fund investors are also subjected to the same trading costs indirectly, as the fund in turn pays for these costs.

The tax on redemption of equity ETFs depends on the period of holding. If the holding period is more than a year, then there is long-term capital gain. It is exempt if the gain is up to Rs.1 lakh. For long-term capital gain of above Rs.1 lakh, the tax liability is 10% without indexation benefits. However, if the holding period is less than 12 months, then 15% tax liability arises from short-term capital gain.

In ETF (other than equity) and FOF, if the holding period is less than 36 months, there is short-term capital gain. Income from such sales is included in the normal income, and tax is calculated as per normal slab rates. Also, the tax liability of 20% (with indexation benefits) is calculated if long-term capital gain arises from selling such assets. The FOFs are treated as debt funds regardless of any of the schemes they invest in.

ETFs v/s Stocks & Mutual Fund

* subject to tracking errors