ETFs versus largecap mutual funds

ETFs versus largecap mutual funds 

ETFs or exchange traded funds are similar to mutual funds as both instruments are a collection of securities to offer investors diversified portfolio in shares, debt, liquid, gold and also international indices. 
Each ETF has its net asset value of the underlying stocks that it represents, which you can buy and sell on a real-time basis throughout the day, as it is baskets of securities that are traded, like individual stocks, on an exchange. 
ETFs can be bought and sold, short sell throughout like any stock on screen based trading system and can be purchased on margin. Trading facility is on investors’ fingertips through mobile app nowadays. One needs to open a demat account with a SEBI registered stockbroker. One can investment minimum in one unit and it can be held for as long as the investor wants it in his demat account.
ETF is beneficial for those investors that could not be analysing and picking stocks for their portfolio, as selection of quality stocks needs knowledge etc.

Recent regulatory actions have forced India’s mutual fund houses to re-classify their existing schemes. The sole motto of the new guidelines is basically to rationalise the plethora of schemes, which, at times, were quite confusing for investors. This, often, led to poor investment decisions, and even misselling of mutual funds schemes. 

The returns from ETFs may either be on a par with largecap schemes or better as has been seen in recent years. Second, ETFs would be much cost-efficient as fees in ETFs could be as low as 0.01 per cent while fees for largecap mutual fund scheme can be anywhere between 1.5 per cent and 2.5 per cent. Such a huge differential in fees can really make ETFs far superior as higher expense fees of largecap funds tend to impact the returns in investors’ hands. 

Third, the net asset values (NAV) of largecap schemes, like any other mutual fund schemes, are calculated after the closing of market hours, thus investors get a certain price every day. However, in case of an ETF the price changes throughout the day and investors get several price levels of entry or exit points and thus are not limited by the post market hours NAVs. The other reason to avoid large-cap funds would be the high churn in the schemes. 

India already has started showing signs of significant rise in ETF activities. In the past two years, ETF assets (barring gold ETFs) has improved from 1 per cent of the total mutual fund assets to 4 per cent. In absolute terms, the size has grown from Rs 177.43 billion in May 2016 to Rs 812.72 billion in May 2018. This is an indication that smart investors are fast realising the power, importance and effectiveness of ETFs over the plain vanilla large-cap funds. Currently, the ratio has reached over 25 per cent. 

According to global experts, ETF assets will double to $10 trillion by 2022 from the current $5 trillion. ETFs are the future. As the market matures and alpha generation becomes difficult, it will become tough for fund manager to beat the benchmark or index. 

Therefore, it will be in investors’ interest to recognise the potential of ETFs well in advance and seriously take it as a strong alternative to large-cap funds.