A Beginner's Guide To Investing In Nse Etfs

Exchange-Traded Funds (ETFs) are financial instruments that are listed and traded on exchanges like stocks. They are a basket of stocks that reflect the composition of an index, like Nifty 50 or S&P CNX Nifty. ETFs have gained wider acceptance due to their unique advantages over mutual funds, providing investors with broad exposure to entire stock markets and specific sectors with relative ease, in real-time, and at a lower cost than other forms of investing. ETFs are available on the National Stock Exchange (NSE) of India, with diverse options in equity, debt, gold, and international indices. The NSE IFSC (International Financial Service Centre) exchange, based in GIFT City, Gandhinagar, allows retail investors to trade in US stocks, with plans to increase the number of available stocks from 8 to 50. To invest in ETFs on the NSE, investors need to open a trading and demat account with an IFSC-registered broker and transfer funds from their Indian bank account to the broker's account.

How to Invest in NSE ETF

Understanding ETFs: Index funds traded like stocks, reflecting indexes like Nifty 50

Understanding ETFs: Exchange-Traded Funds

Exchange-Traded Funds (ETFs) are index funds traded on stock exchanges like the National Stock Exchange (NSE). They are a basket of stocks reflecting the composition of an index, such as the Nifty 50, a popular Indian stock market index. ETFs combine the diversification of index funds with the flexibility of stocks, making them an attractive investment option.

How ETFs Work

ETFs are designed to mirror the performance of a specific index, such as the Nifty 50, which comprises the 50 largest and most actively traded stocks on the NSE across diverse sectors. The selection of stocks in the Nifty 50 is based on liquidity, trading frequency, and market capitalisation. The index is periodically reviewed to ensure it remains representative of the current market conditions.

The trading value of an ETF is derived from the net asset value of the underlying stocks it represents. When you invest in an ETF, you gain exposure to a diverse range of stocks within the chosen index. This provides a level of diversification that can help reduce risk compared to investing in individual stocks.

Benefits of ETFs

ETFs offer several advantages to investors:

• Broad Market Exposure: ETFs provide access to a basket of stocks within an index, allowing investors to gain exposure to a diverse range of companies and sectors in a single investment.
• Lower Costs: ETFs generally have lower expense ratios compared to actively managed funds. While trading costs can be higher, the overall expenses tend to be lower, making them a cost-effective investment option.
• Flexibility: ETFs can be bought and sold during market hours, providing investors with greater flexibility and control over their investments.
• Transparency: ETFs are highly transparent, allowing investors to know exactly where their investments are allocated.
• Dividend Income: Investors can earn dividend income from ETFs, which can be reinvested in the stock market.

Comparison with Index Funds

While ETFs and index funds share similarities, there are some key differences to note:

• Trading: ETFs are traded on exchanges like stocks, requiring a DEMAT and trading account. Index funds, on the other hand, can be bought and sold like mutual funds without the need for a DEMAT account.
• Expense Ratios: ETFs typically have lower expense ratios than index funds, making them more cost-effective. However, ETFs may have higher trading costs, so it's important to consider the overall fees involved.
• Returns: ETFs generally offer higher returns than index funds due to their lower expense ratios and efficient tracking of the underlying index.
• Liquidity: ETFs are subject to the liquidity of the stock market, while index funds are not. This means that ETFs may be more challenging to sell during periods of low liquidity.
• Risk: Both ETFs and index funds carry market risk. However, ETFs are considered a riskier form of investment due to their intraday trading nature and dependence on market liquidity.

Suitability

The suitability of ETFs depends on the investor's preferences and investment style. ETFs are suitable for investors who are comfortable with operating a DEMAT and trading account and can assess ETFs for their price-NAV gap and liquidity. On the other hand, index funds are ideal for those who prefer a simpler approach, as they can be bought and sold like mutual funds without the need for a DEMAT account.

Types of ETFs: Equity, Debt, Gold, International Indices, Bond, Commodity, and Stock ETFs

Exchange-Traded Funds (ETFs) are financial instruments that are listed and traded on exchanges like stocks. They are a basket of stocks that reflect the composition of an index, such as Nifty 50 or BSE Sensex. ETFs provide exposure to an index or a basket of securities that trade on the exchange like a single stock.

There are several types of ETFs available on the National Stock Exchange (NSE) of India:

Equity ETFs

These are ETFs that focus on stocks or equity securities. They reflect the composition of an index, such as Nifty 50, and their value is based on the net asset value of the underlying stocks they represent.

Debt ETFs

Debt ETFs are another type of ETF available on the NSE. These ETFs invest in debt instruments such as bonds, treasury bills, or other fixed-income securities.

Gold ETFs

Gold ETFs are a popular type of commodity ETF that specifically invests in gold. These ETFs are often used to hedge against inflation or as a store of value.

International Indices ETFs

International Indices ETFs provide exposure to stock markets and indices in different countries. They allow investors to gain access to a diverse range of global securities.

Bond ETFs

Bond ETFs invest in various fixed-income securities, including corporate bonds, treasury bonds, and floating-rate bonds. They are passively managed and trade on major stock exchanges, promoting market stability and liquidity.

Commodity ETFs

Commodity ETFs invest in physical commodities, such as agricultural goods, natural resources, and precious metals. They are usually focused on either a single commodity or a broad commodity index. Investors often use commodity ETFs to hedge against inflation or to profit when the stock market is underperforming.

Stock ETFs

Stock ETFs are a type of ETF that specifically tracks a particular set of stocks or a stock index. They are traded on stock exchanges, just like regular stocks, and offer exposure to a specific sector or industry.

Each type of ETF has its own advantages, disadvantages, and risk profile, so it's important for investors to understand the characteristics of each before making investment decisions.

Benefits of ETFs: Diversification, regulation, dividends, liquidity, tax exemption, and hassle-free investment

Diversification

ETFs are ideal for investors who want to diversify their portfolios. They are baskets of stocks that reflect the composition of an index, like the Nifty 50, and their value is based on the net asset value of the underlying stocks. This means that a single ETF can give you exposure to a wide range of stocks across different industries, investment categories, and countries.

Regulation

ETFs are also regulated by the underlying index they track. This means that they are passively managed, and their holdings only change when the index is revised. This passive management leads to lower expense ratios compared to actively managed funds.

Dividends

Some ETFs pay dividends, which can provide a steady stream of income. Dividends from ETFs are taxed in the same way as dividends from stocks. They are considered qualified or unqualified, with qualified dividends generally being taxed at a lower rate.

Liquidity

ETFs are traded on exchanges like stocks, so they offer high liquidity. This means that there are usually plenty of buyers and sellers, and the bid-ask spreads are narrow.

Tax Exemption

ETFs can be more tax-efficient than other investments, such as mutual funds, because they tend to realise fewer capital gains. As passively managed portfolios, ETFs tend to have lower portfolio turnover, and when an investor buys or sells shares, the ETF administrator can match purchases and sales without triggering a taxable event.

Hassle-Free Investment

ETFs are also a hassle-free investment option. They are available to buy and sell throughout the trading day, and their prices are updated in real-time. This makes them a good option for both long-term and short-term investors.

NSE IFSC: The NSE subsidiary for NRIs and foreign investors to trade Indian equities

The NSE IFSC (International Financial Service Centre) is a wholly-owned subsidiary of the National Stock Exchange (NSE) of India. This NSE subsidiary operates an international stock exchange in GIFT City, Gandhinagar, which was set up to help NRIs and foreign investors easily trade Indian equities.

The NSE IFSC exchange in GIFT City is an international exchange where all trades are conducted in US dollars. Investments outside India in foreign exchange are done under the LRS (Liberalized Remittance Scheme), so your investments in NSE IFSC US stocks will also be done under this scheme. As per LRS rules, you can invest up to US$2.5 lakh during a financial year.

At present, you can buy 8 US stocks on the NSE IFSC Exchange: Alphabet (Google), Amazon, Meta Platforms (Facebook), Netflix, Apple, Walmart, Tesla, and Microsoft. This number will be increased to 50 US stocks that will be introduced on the exchange in a phased manner. The trading time on the exchange will be the same as the NYSE (New York Stock Exchange). So, NSE IFSC trading hours will be from 8 pm IST to 2:30 pm IST.

How to Trade on the NSE IFSC

To trade on the NSE IFSC, you will need a new demat account. Your existing demat account for trading domestic shares will not be sufficient, and you will have to open a special demat account with an IFSC-registered broker.

• Open a trading and demat account with an IFSC-registered broker. If your current broker is already registered with NSE IFSC, reach out to them to know about any formalities you must complete before you can start trading in US stocks on the international exchange.
• Transfer funds from your Indian bank account to the account of the IFSC-registered broker. Since NSE IFSC trades are conducted in US dollars, currency conversion is mandatory. You can start trading in US stocks listed on the exchange once your funds have been transferred.

Things to Know Before Trading on NSE IFSC

• Depository Receipts, Not Shares: Investors don't buy actual US stocks through the NSE IFSC exchange. Instead, you will be issued depository receipts, which are financial instruments that represent an equity stock listed on a foreign exchange. NSE IFSC depository receipts are issued by the GIFT City-based HDFC Bank IFSC Banking Unit (HDFC IBU), which buys and holds the actual US stocks on behalf of investors.
• Fractional US Stocks: Unlike direct equity transactions on an international stock exchange, you can purchase US stocks in fractions using depository receipts, increasing affordability.
• Costs to Consider: There are several costs to consider when buying US stocks on the NSE IFSC, including transaction fees, brokerage and demat account charges, and currency conversion charges.
• Taxation of Gains: There is some uncertainty regarding the taxation of gains from DRs of US stocks. If the rules are similar to direct international equity investments, you must stay invested for 2 years or longer to qualify for long-term capital gains (LTCG).

Buying US Stocks on NSE IFSC: Open a trading/demat account, transfer funds, and buy depository receipts

To buy US stocks on the NSE IFSC, you must follow the steps outlined below:

Open a Trading/Demat Account with an IFSC-Registered Broker

You will need to open a new trading and Demat account with a broker registered with the NSE IFSC. Your current broker may be registered, so it is worth reaching out to them to enquire about any necessary formalities.

Transfer Funds to the Broker's Account

Funds must be transferred from your Indian bank account to the account of the IFSC-registered broker. As trades are conducted in US dollars, currency conversion is mandatory. You can begin trading once the funds have been transferred.

Understand the Depository Receipts System

Investors do not purchase the actual US stocks through the NSE IFSC exchange. Instead, you will be issued depository receipts (DRs). DRs are financial instruments that represent an equity stock listed on a foreign exchange, allowing investors to hold equity shares of foreign companies without needing to trade directly on a foreign stock exchange.

Be Aware of Costs and Charges

There are several costs to consider when buying US stocks on the NSE IFSC:

• NSE IFSC transaction fees: The exchange currently charges 12 cents for every US$100 of stocks traded, or 0.12% of the transaction value.
• Brokerage and Demat account charges: These can vary from broker to broker.
• Currency conversion charges: Your bank will charge a fee for converting currency, which can also vary between banks.
• Taxation of gains: There is some confusion over whether DRs of US stocks will be taxed according to rules for direct international equity investments. It is recommended that you consult official tax advice for clarification.

Frequently asked questions