EXCHANGE TRADED FUND (ETF)
vs OPEN ENDED EQUITY MUTUAL FUND
Today lots of investment experts
and Fund Managers advocating of more Exchange Traded Funds (ETFs ) in Mutual
Fund Industry . USA and other developed economies MF industry have a big
dominance of various ETFs and many feel India should also be having more and
more ETFs . It has got both pros and cons if looked from the perspective of a
real ground realities and scenarios .
ETFs are MF product ( portfolio based
on any defined basket of securities ) which is listed and traded at the stock
exchange like a share . It can be bought and sold on a real time price like
share and unlike other MF products which have only one NAV for the day . So it
captures features of both MF ( Portfolio ) and share ( tradability on real time
price) .
Lets evaluate what risk it poses
for investors .
As an investor rather than
trading on a particular stock I can trade on basket of similar industry stocks (banking
,IT , Pharma etc ) or similar risk category ( market cap ) or indices ( nifty
etc ) . Portfolio is more or less known to me but is portfolio risk i.e short
term volatility due to buying and selling of stocks at the stock exchange on
real time basis is known to me ? Just like stock the quality does not matter
for a day trader but the entry and exit price and timing it at right time
matters . Do a normal MF investor has knowledge, information , skills to time
entry/exit at right price ?
The downside risk in Equity MF is
mitigated by being a long term investor ( > 5 years ) whereas this is more
of a short term investment product . If it is to be invested as long term and I
wish to bet on market and not on fund management ( active ) then why not go for
Index Fund rather than ETF .
Many experts talking of lower cost
vis a vis normal MF product . But cost is an irrelevant aspects considering the
downside risk from return in short term . Moreover have we factored the
taxation side . In Equity MF if any profit booked in the fund it is not taxed .
Taxation comes into force only when investor gains by selling the units whereas
in ETFs if the investor will be gaining due to impact of same share his
taxation will be like normal share . In Equity MF , fund is an intermediary
executing trade on behalf of investor so not taxed whereas in ETF there is no
intermediary but direct execution by investor so any gain is taxed .
Some talk of easy and quick
liquidity vis a vis MF products . But again liquidity at what cost ? Buying and
selling behaviour of a day trader can create short term volatility in pricing
of the stock and if that stock is in ETF product it will have similar impact .
Will it not create more confusion on entry/exit pricing and action as he can
not track on real time basis the movements if he is a normal Equity MF
investors . Indian stock market and stock prices are mispriced most of times in
short term as compared with developed countries and so if a laymen enters in
big way in ETF he is infact helping a day trader to gain at his cost . Who
knows many promoters can through cartel of stock broker gain through trade inducing
a normal investor to fall into their trap .
Its true that today in
information age we have access to information on real time basis but again how
many of investors have skills to analyse them correctly and most importantly what
about the authenticity of the information itself .
I feel ETF is no doubt a very good
product and may be future of MF Industry in India but looking at the market
mispricing stocks in short term , behaviours of different participants in stock
market its not a product which can be positioned as alternative to equity MF
but yes can be positioned as an alternative to direct stock trading.
The MF industry should put more emphasis
on educating the investors on risk side . The ignorance and lack of knowledge
of most investors have to be removed first . Skill sets have to be developed if
we want investors to act and behave like a professional fund manager or equity
day trader . Pushing a product aggressively to a normal MF investor before that
will do more harm than gain for the MF industry .
