You can’t buy fractional units in ETFs2 min read . Updated: 12 Feb 2020, 10:16 PM IST
- An index may have a corresponding ETF but not an index fund
- The expense ratio is slightly higher for index funds compared to ETFs
Is it possible to invest in exchange-traded funds (ETFs) or index funds via systematic investment plans (SIPs)? I want to raise ₹8 lakh in five to six years and can invest ₹10,000 every month. Please suggest a few schemes.
With a time frame of five to six years and a modest target of ₹8 lakh, an SIP of ₹10,000 will very likely get you there, assuming a portfolio return of 10-12% per annum during the period. Yes, it is possible to invest in ETFs via an SIP. However, since ETFs are transacted using brokerages, it would depend on the brokerage that you are using and whether or not they offer this feature. Be aware that when it comes to ETFs, buying fractional units is not possible. That means your entire SIP amount may not be invested during a transaction. Say, an ETF unit costs ₹2,000 on an SIP date and your SIP amount is ₹5,000, only ₹4,000 (for two units) would get invested in the ETF that month.
It would be a lot easier when it comes to index funds as they are regular mutual funds in which SIP can be done and buying fractional units is possible.
Remember that an index may have a corresponding ETF but not an index fund. Also, the expense ratio is slightly higher for index funds compared to ETFs. Nevertheless, it is a good idea to have SIPs in index funds. HDFC has index funds available for both Sensex and Nifty. ICICI Prudential has one available for Nifty Next 50, among others.
What is the difference between direct and regular plans? Which one is better?
Direct plans are a variant of mutual fund schemes that are available at a lower cost (expense ratio). Initially, direct plans were offered with the intention of saving costs for investors who buy directly without using an intermediary. However, over the last seven to eight years, several platforms have emerged to facilitate investing in direct funds.
Regular plans, on the other hand, are offered by distributors who also provide advice in terms of suitability of funds.
If you have just begun investing in mutual funds, it is important that you get good guidance for building your portfolio. You can either get it by opting for a regular plan through a good distributor, or you can take assistance from a registered investment adviser who will help you buy through a platform that offers direct funds. Ensure that you get reliable guidance.
Srikanth Meenakshi is co-founder, PrimeInvestor.in. Send in your queries and views at firstname.lastname@example.org