What is an Exchange Traded Fund?

An 'Exchange Traded Fund (ETF)' is special type of mutual fund. It closely mirrors popular stock indices like the 'BSE S&P Sensex' or 'NIFTY' or 'NIFTY Junior' and so on.

Every stock index comprises of select company shares in certain proportion or weigh  which is determined and disclosed by the index. The popular Sensex comprises of the top 30 companies by 'Market Capitalisation'. Once in a while the index is recast. A new company may replace an existing one.

Through an ETF instead of buying individual shares of a company you can buy the specific index itself. For example suppose you are interested in capturing the growth of the NIFTY, which constitutes the top 50 companies by market capitalisation of all the companies listed on the NSE, you have two options, as follows:

1. You can keep track of the index yourself, buy the individual shares in the same quantity as the index and making necessary adjustments as and needed, based on the actual changes in the composition of the index, which is a tedious and time consuming process.
2. Alternatively you can buy the ETF of the index you want to track. The drudgery is taken care of by the fund which created the ETF.

Here I present the various types of ETFs offered by Golaman Sachs in India:

Let us examine the composition of GS Nifty BeES.

The above picture depicts the composition of the GS Nifty BeES as on 1st August 2016.

 For the efforts taken to create and maintain the ETF, the sponsoring mutual fund charges a small annual maintenance fee, besides again reasonable purchase and redemption charges. The greatest advantage of an ETF is the low maintenance fees, usually less than 0.50% per annum. In contrast, mutual funds charge higher fees in the range of 1 to 2.25% per annum, besides the entry and exit loads.

The ETFs can be purchased just as you would purchase shares on the stock market. They are listed along side and among equity shares. This means it saves you the trouble of making an application form with the mutual fund for purchasing and redemption of units.

In conclusion, in my opinion ETFs are much better than mutual funds on account of ease of transaction, low charges as well as efficiency of long term wealth creation.

What is the Minimum SIP Subscription Amount and Best SIP?

Which are the best SIP to invest in India?

I am looking for currently the best SIP plans in India. Also what will be the least amount I can invest in a SIP?

All ‘Systematic Investment Plans (SIPs)’ are equally good or equally bad. Do not be confused by claims of performance or returns. Evaluating the returns based on the ‘Net Asset Value’ or ‘NAV’ is totally absurd, because the evaluating method is purely based on the market price of the underlying shares on a particular date. This system of calculating returns purely based on market price is against the principles of ‘ValueInvesting’. Please read the article “How Do You Calculate Return On SIPs Factoring in All the Operational Costs?”.

So how to choose the right mutual fund that is offering the SIP?

1. Size of Sponsor: In Real investing we are talking about timeframes of not three to five years but 50 years! So the sponsor of the SIP must be a large and reputed organisation that can be expected to be around, without going bankrupt, for the next 50 years. UTI, SBI, HDFC are a few examples of such sponsoring organisations.
2. Diversified Index Funds: Please do not get carried away by fancy sectoral funds like ‘Pharma’, ‘Auto’ etcetera, and go for a scheme proposing to invest the funds in a diversified, index fund, for example BSE S&P 500 index fund.
3. Fund Management Charges: Kindly pay attention to the charges levied for fund management. There are charges like ‘Entry Load’, ‘Exit Load’ and ‘Annual Fund Management Fee’. These usually range from 1–3%.which are exorbitant, considering that after about 30 years your investment would have grown to a few crore (10 million is 1 crore) rupees. They should be minimum. So among the short listed funds based on above two criteria, choose the scheme that charges lowest fees.

Own SIP of ETFs:

Let me give you an exciting alternative to a SIP offering by a mutual fund in the form of ‘Your Own SIP of ETFs’. An ‘Exchange Traded Fund’ or ‘ETF’ is kind of mutual fund, which reflects a popular index like ‘BSE Sensex’, 'NIFTY 50′ and ‘NIFTY Junior’. An ETF has following two great advantages:

1. Units are traded on stock exchanges like BSE and NSE.
2. Are listed alongside individual scrips and can be purchased similarly on online trading platforms of stock brokers.
3. Most importantly the annual fund management charges are usually very low and stand below 0.50% per annum. This is going to help in maximising your wealth in a big way when we are talking of 50 years and crores of rupees of your wealth at the last decades, generated out of your humble SIP investments.
4. When you create a SIP of ETF voluntarily from your own side there is no sword hanging on your head. You can vary subscription amount as you wish. But in order to choose this path you must be a highly disciplined person. Many a times freedom leads to laziness and noncompliance.

Finally coming to your question what is the minimum amount, I hear that it can be as low as Rs.50 a month (UTI Retirement Benefit Pension Fund}. I believe ICICI Prudential also offers a SIP of Rs.50. But for your own wealth creation benefit it has to be a meaningful sum. I would recommend a bare minimum of Rs.500 per month and ideally a minimum of Rs.3000 to 5000 a month.

Finally, the last and crucial golden rule of SIP, which no one emphasises is that a SIP shall be kept alive uninterrupted for very, very long time periods like 50 years. Only then the ‘Miracle of Compounding’ will have an opportunity for work for you and make you a rich and wealthy individual irrespective of which financial class you presently fall in.

Every person, including the one from the most humble background and means, can become a ‘Crorepati’ or a ‘Millionaire’ through long term systematic investment plan. I am committed to make this dream come true globally.

What will give me more profit after 5years? Investment in properties or in stock market or in mutual funds?

Your question has two major elements and the second major element another three sub options, as follows:

1. Investment Timeframe - Five years
2. Investment Options:

• Property
• Stock Market
• Mutual Funds

All value investors, including myself, do not consider property as an sensible investment option for the simple reasons, it is:

• Illiquid
• Return on investment by way of rent is unjustifiably low
• Capital Appreciation benefit is available as in shares and mutual funds but the quantum is more dependent on luck.

The investment options left are only stock markets and mutual funds, but before I address them let me take-up the investment period element.

An investment horizon of five years is very short. twenty years is minimum and about fifty years is ideal. Only when you invest for such long time, the law of ‘Miracle of Compounding’ will have the opportunity to work for you and make you really rich and wealthy.

Coming back to investment options of stock markets and mutual funds, both are good. Direct stock market investing requires special knowledge which you can acquire from the book, Intelligent Investor - The Investors' Bible and you may also kindly visit my blog,Value Investing.

As far as mutual funds are concerned, they are the best choice for those who do not wish to or do not have the time required to study stock market investment. One of the problems with mutual funds is that they charge a heavy fund management fee. There is yet another version of the mutual fund called an ‘index fund’ or ‘exchange traded fund’ which mirror popular stock market indices like the S&P BSE Sensex or NIFTY 50, where the charges are low and very reasonable.

Would Now (August 2016) be a Good Time to Invest in an Index Fund?

For Investing in an Exchange Traded Fund ( ETF ) or a mutual fund, all times are equally good.In case the market is exceptionally low or bearish, you can increase the quantum of investment can be increased.
From a Value Investing perspective, now, August 2016, the valuations are high. About an year back as well as a short time ago the BSE SENSEX was around 24000, which as per earnings of select stocks, the conditions were favorable.I reapet once again that there is no point in waiting for a good time to invest in ETFs and mutual funds. So please start immediately.

How Do I Invest Small Amount of Money in Share Market Safely?

Dear Friend!

I find your question is very sensible on two crucial aspects: small amount of money and safety of investment.

Safety of investment comes from knowing what we are doing. Conversely not knowing what we are doing causes ‘Investment Risk’. There are two things you can do:

1. You can learn investing safely in the share market through ‘Value Investing’ for which I recommend you read the wonderful book, “The Intelligent Investor” by Benjamin Graham. Value Investing is safe and shares can be purchased for small amounts of money. 
   
2. If you can not learn investing for whatever reasons, you may invest in an ‘Exchange Traded Fund’ or ‘ETF’ or a ‘Mutual Fund’.

ETFs:

An ETF is created by fund managers that exactly reflect popular stock indices like BSE Sensex and NIFTY. In India ‘Goldman Sachs’ provide many ETFs, the popular being ‘Nifty BEES’ and ‘Junior Nifty BEES’. You may also invest in any mutual fund of a credible organisation. ETFs can be purchased just like shares on the stock market through online online platforms.

Mutual Funds:

Mutual Funds are operated by reputed financial institutions. There are different funds based on equity, debt and various mixes of both. Debt funds provide regular income but no capital appreciation. Equity funds provide both. Please do not allow yourself to be confused by issues like which mutual fund best returns. All funds are equally good in the very long term.

What is important in investing is not to disturb the investments for very, very long periods of time, say for twenty to fifty years. Over such long periods of time the law of ‘Miracle of Compounding’ will work for you in creating significant wealth.

In conclusion, yes, you can invest small sums safely in the stock market and become rich over a long time.