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Index Funds/ ETFs

Index Funds:

As the name suggests, an Index Mutual Fund invests in stocks that imitate a stock market index like the NSE Nifty, BSE Sensex, etc. These are passively managed funds which means that the fund manager invests in the same securities as present in the underlying index in the same proportion and doesn’t change the portfolio composition. These funds endeavor to offer returns comparable to the index that they track.

Suitability:

Index funds are ideal for investors who are risk-averse and expect predictable returns. These funds do not require extensive tracking. For example, if you wish to participate in equities but don’t wish to take risks associated with actively-managed equity funds, you can choose a Sensex or Nifty index fund.

Minimum Investment:

The minimum investment varies from scheme to scheme. It could range between Rs. 100 to Rs. 5,000

Taxability:

Index Funds receive the same tax treatment as other equity funds. Short term capital gain (less than one year): 15% of gain Long term capital gain (more than one year): 10% of gain in excess of Rs one lakh per year.

ETFs:

Exchange Traded Funds are essentially Index Funds that are listed and traded on exchanges like stocks An ETF is a basket of stocks that reflects the composition of an Index, like S&P CNX Nifty or BSE Sensex. The ETFs trading value is based on the net asset value of the underlying stocks that it represents. Think of it as a Mutual Fund that you can buy and sell in real-time at a price that change throughout the day.

ETFs offer several advantages to investors: –

· Can easily be bought / sold like any other stock on the exchange through terminals across the country.

· Can be bought / sold anytime during market hours at a price close to the actual NAV of the Scheme.

· No separate form filling. Just a phone call to your broker or a click on the net.

· Ability to put limit orders.

· Minimum investment is one unit.

· Enjoy flexibility of a stock and diversification of index funds.

· Expense Ratio is lower.

· Provides arbitrage between Futures and Cash Market.

Suitability:

ETFs are suitable for the investor who wants to invest in passive fund with low management fee

Minimum Investment:

The minimum investment varies from scheme to scheme. It could range between Rs. 100 to Rs. 5,000

Taxability:

These funds receive the same tax treatment as other equity assets. Capital gains earned on the holding period of as long as one year are called short term capital gains (STCG). These attract 15% of tax. On the other hand, long term capital gains (LTCG) have an investment period of over one year. According to the prevailing tax rate, the LTCG that falls over 1 lakh is taxed at 10% without indexation advantage.

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