A Beginner's Guide To Etf Investing With Zerodha

Exchange-traded funds (ETFs) are a type of mutual fund that can be traded on an exchange like stocks. ETFs are a basket of securities that track an underlying index. For example, a Nifty 50 ETF tracks the composition of the Nifty 50 Index, which consists of the 50 biggest Indian stocks across 13 sectors. ETFs can be bought and sold anytime, just like stocks, and offer investors the opportunity to benefit from intraday price movements. Zerodha offers investors the ability to buy and sell ETFs at a reduced cost, with the added benefit of a simple-to-use app called Zerodha Kite. This allows investors to search for symbols, add markets to their watch list, and place orders with ease.

Zerodha ETF: What is it?

Zerodha ETF or Exchange-Traded Funds is a type of mutual fund scheme that is listed and traded on a stock exchange like stocks. ETFs are a basket of securities that track an underlying index, such as NIFTY or Gold. They are considered stocks if they are traded on an exchange and the member investing in them has an asset.

ETFs are an ideal investment scheme as they are simple to understand and cost-efficient, increasing the chance of gaining profit. They are also flexible, as investors can buy and sell them anytime, just like stocks.

With Zerodha, investors can buy or sell ETFs at a reduced cost, which offers more benefits. When an investor buys an ETF with Zerodha, it gets transferred to their Zerodha Demat account in two days. The brokerage charges for ETFs with Zerodha are the same as for delivery-based trades, but they do not include any STT charges as they are not considered securities.

The actual charges for ETFs with Zerodha are transaction charges of 0.00325% on turnover, calculated as:

> Quantity x Price plus 18 percent GST.

Additionally, SEBI charges Rs 10/crore plus stamp duty, which varies depending on the state of the correspondence address.

Trading in Zerodha ETFs is simple and can be done through the Zerodha Kite app. Investors can search for a symbol, add it to their market watch, and then place an order.

Overall, Zerodha ETFs offer a brilliant opportunity for investors to reduce investment costs and increase the probability of earning more profit.

How to buy and sell ETFs on Zerodha

To buy and sell ETFs on Zerodha, you must first open a trading or Demat account with Zerodha. You can then use the Zerodha Kite app to trade ETFs.

To buy an ETF, search for the symbol, add a market watch, and place an order.

It is important to note that ETFs are traded on the secondary market, so there are no entry or exit load charges. The actual charges of buying and selling ETFs with Zerodha are transaction charges of 0.00325% on turnover, calculated as: Quantity x Price plus 18% GST. There are also SEBI charges of Rs 10/crore plus stamp duty, which varies depending on the state of the correspondence address.

When buying and selling ETFs on Zerodha, it is recommended to use limit orders, as market orders can result in poor fills or higher prices. It is also important to check the iNAV on the AMC website and compare the ETF price with the underlying index to ensure you are getting a fair price.

By following these steps and considerations, you can buy and sell ETFs on Zerodha, taking advantage of intraday price movements and the ability to make small investments.

Zerodha ETF charges

Liquid BeES and Liquid ETFs :

• Transaction charges:
• NSE: 0.00297% (₹2.97 per lakh)
• BSE: 0.00375% (₹3.75 per lakh)
• GST: 18% on the transaction charge
• SEBI charge: ₹10 per crore of turnover + 18% GST
• Stamp duty: Uniform stamp duty based on the value of the transaction
• DP charge: When Liquid BeES is sold from the demat account, a DP charge of ₹9.50 + 18% GST applies. For accounts with female primary holders, the DP charge is reduced to ₹9.25 + 18% GST. For Liquid ETFs, the DP charge is ₹13 + 18% GST, and for accounts with female primary holders, the charge is reduced to ₹12.75 + 18% GST.

Equity Delivery Investments (NSE, BSE):

There are no brokerage charges for equity delivery investments.

Intraday and F&O Trades:

• Flat ₹ 20 or 0.03% (whichever is lower) per executed order on intraday trades across equity, currency, and commodity trades.
• Flat ₹20 on all option trades.

Direct Mutual Fund Investments:

There are no commissions or DP charges for direct mutual fund investments.

NRI Brokerage Charges:

• For a non-PIS account: 0.5% or ₹100 per executed order for equity (whichever is lower).
• For a PIS account: 0.5% or ₹200 per executed order for equity (whichever is lower).
• ₹500 + GST as yearly account maintenance charges (AMC).

Margin Trading Facility (MTF):

• MTF Interest: 0.04% per day (₹40 per lakh) on the funded amount, applied from T+1 day until MTF stocks are sold.
• MTF Brokerage: 0.03% or Rs. 20/executed order, whichever is lower.
• MTF pledge charge: ₹30 + GST per pledge request per ISIN.

Other Charges:

• Payment gateway charges: ₹9 + GST (not levied on UPI transfers).
• Delayed Payment Charges: 18% interest per year or 0.05% per day on debit balance in the trading account.
• Physical CMR request: First request is free; subsequent requests are ₹20 + ₹100 (courier charge) + 18% GST.

Zerodha ETF vs index funds

Exchange-traded funds (ETFs) and index funds are both passive investment vehicles, meaning they track an underlying index or benchmark. However, there are some key differences between the two.

ETFs

ETFs are a basket of securities, such as stocks, bonds, and commodities, that trade on stock exchanges. They offer low-cost exposure to the market and can be bought and sold anytime during market hours, just like stocks. ETFs have a creation and redemption mechanism, which allows investors to create and redeem units directly with the asset management company (AMC) in specific lot sizes called creation units. This mechanism helps maintain liquidity and arbitrage premiums and discounts. When investing in ETFs, it is important to use limit orders and compare the market price with the intraday or indicative Net Asset Value (iNAV) to ensure you are getting a fair price. ETFs have a lower tracking error, meaning they closely track the underlying index. Examples of ETFs offered by Zerodha include the Nifty 1D Rate Liquid ETF, Nifty Midcap 150 ETF, and Gold ETF FoF.

Index Funds

Index funds are mutual funds that aim to replicate the performance of a specific benchmark or index. They have a passive investment strategy, seeking to match the returns of the index before costs. Index funds have lower expense ratios compared to active mutual funds, as they do not require highly paid fund managers or extensive research. The performance of index funds depends on the performance of the underlying index. An example of an index fund offered by Zerodha is the Nifty LargeMidcap 250 Index Fund.

Comparison

While both ETFs and index funds offer passive investment strategies, there are some key differences to consider:

• ETFs offer more flexibility as they can be bought and sold during market hours, while index funds do not allow immediate buying and selling.
• ETFs have a lower tracking error and closely track their underlying index, while index funds tend to hold more cash, resulting in a slightly higher tracking error.
• ETFs have a creation and redemption mechanism that helps manage liquidity, while index funds do not have this feature.
• ETFs may have wider spreads during market volatility, while index funds have no issue with spreads as execution happens at the end of the day.
• ETFs have a slightly higher expense ratio compared to index funds, as brokerage and other charges are separate.
• Index funds offer a simpler choice for investors who want a more passive approach, while ETFs allow for more active control and tactical strategies.

Zerodha ETF performance vs actively managed funds

To begin investing in ETFs on Zerodha, you must first understand what they are. ETFs, or Exchange-Traded Funds, are a basket of securities, like stocks, bonds, and commodities, that are traded on stock exchanges. They are similar to mutual funds but differ in that ETFs can be bought and sold at any time during the trading day, just like stocks.

When considering investing in ETFs, it is essential to compare their performance with actively managed funds. In the last decade, index funds and ETFs have gained popularity as an increasing number of investors recognise that the majority of actively managed mutual funds do not beat their benchmarks. This is particularly true in developed markets like the US, where around 90% of active funds underperform.

The underperformance of actively managed funds can be attributed to a combination of high costs, increasing market efficiency, and internal fund mandates that prevent significant deviations from the indices. Additionally, the odds of finding information that can significantly impact a stock's performance are slim, as most investors now have access to the same information.

As a result, ETFs like the Nifty 50 index fund, which has outperformed 90% of large-cap mutual funds, are a more attractive option for investors. The Nifty 50 index represents 66.8% of the free-float market capitalisation of all stocks listed on the NSE, making it a strong choice for investors looking for exposure to the Indian market.

However, it is important to note that ETFs are relatively new in India and have not gained widespread popularity among retail investors. Most ETF investments in India are made by high-net-worth individuals (HNIs) and institutions. Nevertheless, retail participation in ETFs has been steadily increasing, and ETFs can be a viable option for investors looking for low-cost exposure to the market.

Frequently asked questions