NSE ETFs

What Are NSE ETFs?

An Exchange-Traded Fund (ETF) is a simple investment solution for a retail investor. They track specific indices or assets such as Nifty 50, Nifty Next 50, gold or international indices. NSE ETFs combine features of both mutual funds and stocks. They allow investors to buy and sell throughout the trading day at the market-determined prices. The primary goal of this form of investment is to provide returns that closely correspond to the performance of their underlying benchmark.

How Do NSE ETFs Work?

ETFs work through a unique creation and redemption mechanism, including an asset management company (AMC), Authorised Participants (APs) and individual investors. The process of NSE ETFs functioning includes two markets: primary and secondary markets. Here’s a quick look at a few factors that shape the working principle of ETFs traded on NSE:

• Primary Market (Creation/Redemption): This includes larger financial institutions such as Authorised Participants (APs), which facilitate the creation and destruction of ETF units.

• Secondary Market: In this market, individual and retail investors can buy or sell such ETFs.

• The Basket: ETFs owns a variety of assets, such as all 50 stocks in the Nifty 50 index or a large volume of physical gold.

• The Units: The fund divides this basket into small pieces called ‘units’, which are then listed on the National Stock Exchange (NSE).

• Automatic Tracking: The primary goal of the ETF manager is to mirror the performance of the underlying index or asset. For instance, if the Nifty 50 index goes up, the ETF units' value will also increase.

How Are ETFs Traded In NSE?

ETFs are traded in the same way as you invest in stocks, but a few factors need to be followed. They are as follows:

• You must have a demat account.

• Trade hours: 9:15 AM - 3:30 PM

• Orders can be market, limit, or advanced types.

• Despite an underlying Net Asset Value (NAV), the market price of ETFs can trade slightly above (premium) or below (discount) the NAV.

Order Types

ETFs traded in NSE mainly through a demat and trading account. Typical orders are as follows:

• Market Order: With the help of this order, you will be able to sell or buy ETFs at the existing market price.

• Limit Order: This order type allows you to schedule to buy or sell at a predefined price.

• Stop Loss / Stop Limit Order: It allows investors to manage risk by setting a trigger price to exit a position (sell) or enter a new one (buy) once the commodity value hits a certain level.

Placing ETF Orders on the NSE

• ETF trades are placed using your broker, such as the Kotak Neo online trading platform or mobile app (Kotak Neo).

• Orders are matched on the exchange in real time based on price and time priority.

• Once executed, ETFs are credited to or debited from your demat account during settlement.

Benefits Of NSE ETFs

ETFs bring exposure to an index or a basket of securities that trade on stock exchanges. They offer several advantages, some of them are as follows:

• ETFs have the convenience of intra-day purchase or sale on the exchanges.

• ETFs allow investors to closely track the performance of an index through the day with the option to make a buy/sell order at any time.

• ETFs are like any other index funds, wherein subscription/redemption of units works on the concept of exchange with underlying securities.

• ETFs on the NSE are typically passively managed, which results in significantly reduced expense ratios and management fees.

Risks & Limitations Of NSE ETFs

NSE ETFs provide an efficient method for investors to track major indices, but these are not risk-free investments. Market changes and operational constraints can influence their performance. In this aspect, here’s a quick look at the risk and limitations of ETF traded in NSE:

• Market Risk: NSE ETFs have the same market volatility as the underlying indexes that they track. In times of extreme volatility or when the market goes down, the ETF may fall sharply in value, and there is no assurance that you can count on capital protection.

• Tracking Error: ETFs are expected to match an index, but due to differences in the management of the fund, transaction fees and the timing of buying or selling, the returns of the ETF and the index it tracks might not be identical. This error is referred to as tracking error.

• Liquidity Risk: When trading volumes are low, the units may not be easily bought or sold at desirable prices, in some cases resulting in increased bid-ask spreads and implicit cost.

• Expense Ratios and Management Fees: ETFs traded in the NSE might have management fees as well as other expenses and such costs have the potential to take away longer-term returns, particularly in low-liquidity ETFs

How To Buy ETFs Listed On NSE via Kotak Neo?

You’ll need to create a demat and trading account with Kotak Neo to buy NSE ETFs. Once you’re done, here's how you can invest in ETFs from NSE. Once you’re done, here's how you can invest in ETFs from NSE:

• Open the Kotak Neo mobile application or the Kotak Neo website.

• Use the search function within the platform and type in the name or symbol of your preferred ETF from NSE.

• You will be redirected to the equity order placement page. Here, you need to enter Price, Quantity, and other details and submit the order.

• Next, choose your preferred payment method and click on ‘Place Order’.

Who Should Invest In NSE ETFs?

NSE Exchange Traded Funds can be used by a broad spectrum of investors who are looking for an economical, diversified and transparent means to access the market. Let’s have a closer look at how it suits your investment style:

• First-time Investors: ETFs provide an accessible entry point into the equity market. You can easily diversify with several companies at one investment, which limits the risk of individual stocks.

• Long-term Wealth Creators: This type of fund is best applied to long-term investors, those having a long time horizon, who are willing to accumulate wealth slowly with the aid of broad-market equity ETFs (such as the Nifty 50 ETF).

• Sector-Specific Investors: You can invest in sector-specific ETFs to get targeted exposure to industries like banking, IT, or commodities like gold.

Conclusion

ETFs traded on NSE are a cost-effective, flexible, and easy method of engaging investors in financial markets. They can be used by both beginners and experienced investors due to their intraday liquidity, transparent pricing, and diversified exposure. NSE ETFs can serve a useful long-term wealth-generating purpose, and can also be used to match portfolios with targeted investment goals and risk tolerance.