Mutual fund SIPs have become hugely popular because they’re simple, flexible, and help you build wealth slowly without needing a big lump sum. You just need to invest a fixed amount regularly, and with time, your money grows thanks to the power of compounding. ETFs, on the other hand, were launched in 2002, so they are relatively newer investment vehicles. Many investors see them as a viable option due to their low costs and tradability, and wonder if they can start a sip in etf.
In recent years, some platforms have allowed investors to combine the power of SIPs with ETFs. Let’s understand what exactly an etf sip is and how you can get started with it in just a few simple steps.
What is SIP in an ETF and How Does It Work?
An etf sip allows investors to buy a certain amount of ETFs at regular intervals, such as monthly. The basic principle behind sip in etf is the same as an SIP in a mutual fund: You invest regularly to build wealth over time in a disciplined manner. But the key difference is that mutual fund units can be fractional. For example, let’s say you invest Rs. 5,000 every month in an equity fund. If the fund’s NAV is Rs. 11.50, you’ll be allotted approximately 434.78 units. Your exact investment amount is fully utilised every month, regardless of the NAV.
With ETFs, this works differently. When you invest in ETFs, you must buy at least 1 unit at the current market price listed on the stock exchange. Since ETFs are priced in real time, their prices fluctuate throughout the day. This means the exact amount you invest each month can change depending on the price of the ETF at the time of purchase. When you set up an ETF SIP, instead of a fixed amount of money to invest, you’ll generally need to enter the number of units you want to buy at regular intervals. Some platforms allow you to select a fixed amount, too, but in such cases, they will buy as many full units as possible within that amount, and any leftover cash will remain uninvested (or carried forward). Here’s how you can set up an ETF SIP in both ways:
Fixed Amount of Units
Let’s say an investor decides to buy 10 units of a NIFTY 50 ETF every month. If the ETF is priced at Rs. 280 this month, they’ll invest Rs. 2,800. Next month, if the price rises to Rs. 290, they’ll invest Rs. 2,900 for the same 10 units.
This method is more common on stockbroking platforms, which also allow you to set price limits. For example, you can choose to buy 10 units only if the price per unit stays below Rs. 300.
Fixed Amount of Money
Now let’s assume you want to invest Rs. 5,000 every month in an ETF. If the ETF is priced at Rs. 200, you will buy 25 units. If next month, the price rises to Rs. 250, you’ll get 20 units. But what happens if the price rises to Rs. 300? Since Rs. 5,000 is not completely divisible by Rs. 300 (16.67), you won’t be able to invest the entire Rs. 5,000. Instead, you’ll buy 16 units of ETFs for Rs. 4,800, and the remaining amount (Rs. 200) will stay unused in your platform’s wallet.
Benefits of Doing SIP in ETFs
Advantages of starting sip in etf include:
- Lower Expense Ratios: Unlike most mutual funds, ETFs are passively managed, which brings their expense ratios down substantially.
- Diversification: When you invest in an ETF, you gain exposure to a basket of securities, which reduces your risk compared to investing in stocks individually.
- Tradability: ETFs are listed and traded on stock exchanges, so you can trade them just like shares. Mutual funds can only be transacted once a day based on the NAV, but ETFs can be bought or sold at any time during market hours at live market prices.
- Good for Long-Term Goals: An etf sip helps you stay disciplined, which is a key trait for successfully achieving goals like an early retirement plan, saving your child’s education, or buying a home.
- Liquidity: You can buy or sell your ETF units at any time the market is open. However, since ETFs are relatively newer in India, not all of them have high trading volumes. If the volume is low, you run the risk of getting stuck with units that are hard to sell or having to sell at a price lower than expected. If you’re unsure about ETF evaluation, a financial consultant company can help you understand the average daily trading volume, spread between buying and selling prices, and what kind of index the ETF is tracking, so you can select ETFs that are liquid, cost-efficient, and aligned with your financial goals.
How to Do SIP in ETFs in India?
Setting up an ETF SIP depends on your brokerage platform, but there are some common steps that most platforms follow. Here’s a guide to get you started:
1. Open A Demat Account
ETFs are held in a demat account, so first, you’ll need to open one. Ensure that the platform offers an etf sip facility, since not all of them do.
2. Select Suitable ETFs
Choose ETFs based on your financial goals, risk tolerance, and market conditions. Most platforms allow you to create a basket of ETFs, so you can combine multiple ETFs into a single investment plan. This way, you can invest in all of them in one go.
3. Choose SIP Mode (Fixed Units or Fixed Amount)
Depending on the platform, you’ll either:
- Enter the number of units you want to buy each month (for example, 20 units), or
- Enter the amount you want to invest (for example, Rs. 3,000 per month), and the platform will buy as many whole units as possible.
If you’re wondering how to do sip in etf using a fixed amount, you’ll need to check whether your brokerage platform offers the facility. If it does, your SIP will work similarly to how it does in the example above. Since you’ll need to buy whole units of ETFs, there will be times when your entire investment amount isn’t fully utilised, which is something to keep in mind.
4. Set Investment Frequency and Date
You’ll also need to enter how often you want to invest, like monthly, weekly, or quarterly, and choose your preferred date. Since ETFs are traded in real time, you can even select the exact time at which the trade will be executed. For instance, you can set up automatic purchase orders at 10:15 AM on the 5th of every month. Once all the details are entered, money will either be debited from your linked bank account or your platform’s wallet and then invested into your ETF basket.
5. Monitor Your Investments
You can easily track your SIP through your broker’s dashboard. Keep an eye on how well your ETFs are performing and make changes to the SIP if your financial goals or market conditions change.
If you’re new to investing and unsure which ETFs suit your goals, you can always connect with a personal financial advisor in pune or anywhere else in India online. They can help you choose the right ETFs based on your profile, set up your SIPs correctly, and monitor and rebalance your portfolio when needed.
SIP in ETFs vs SIP in Mutual Funds
While the ‘Systematic Investment Plan’ part of both is the same, there are quite a few differences between an etf sip and a mutual fund SIP:
| Factor | ETF SIP | Mutual Fund SIP |
| Demat Account | A demat account is required to invest in ETFs. | There’s no need to own a demat account to start a mutual fund SIP. |
| Units | Units cannot be bought fractionally. One must buy at least a single unit of ETF. | Mutual fund units can be fractional, for example, 200.42 units. |
| Price | ETF prices fluctuate throughout the day. | Mutual fund units are bought at the end of day NAV. |
| Management Style | ETFs track specific indices, so they are passive investment products. | Most mutual funds are actively managed, but some, like index funds, are passively managed. |
| Expense Ratios | ETFs are cost-effective investments due to their passive nature. Their expense ratio is much lower than that of actively managed mutual funds. | The expense ratios for actively managed funds are much higher in comparison. Even passively managed funds have higher expense ratios relative to ETFs. |
| Tradability | ETFs are traded on the stock exchange. | Mutual fund units are redeemed by the asset management company and cannot be traded on exchanges. |
| Minimum Investment Amount | ETF SIPs start with at least 1 unit, so the minimum investment depends on the ETF’s price. | Some AMCs allow investors to begin mutual fund SIPs with just Rs. 100 per month. |
| Liquidity | ETFs can be easily sold if their trading volume is high. For lesser-known ETFs, low trading volume can be a huge concern. You may find it difficult to sell your units quickly or get a favourable price due to higher liquidity risk. | Mutual funds are highly liquid as they can be redeemed directly through the fund house at the day’s NAV. |
Who Should Consider ETF SIPs?
Investors can consider starting sip in etf if:
- They want to diversify their portfolio with passive products that simply aim to mirror an index.
- They are comfortable with operating a demat account and trading every now and then.
- They prefer passive investing over active fund management.
- They are looking for long-term investment vehicles that fit into their goal based planning.
- They want a cost-effective investment strategy, with lower expense ratios and minimal management fees compared to mutual funds.
That said, ETFs may not suit every investor’s style. They can be a bit more complex compared to mutual fund SIPs, as you need to understand how the stock market works, be familiar with using a demat account, and be comfortable dealing with real-time pricing. If you’re confused whether an ETF SIP aligns with your financial goals or risk profile, it could be a good idea to consult a qualified financial advisor. Experts can help you assess your needs, recommend suitable ETFs, and set up your SIP the right way.
Risks and Considerations Before Starting ETF SIPs
You should keep the following things in mind before investing in etf sip:
Tracking Error
Tracking error refers to the difference between the returns of an ETF and the index it is tracking. A lower tracking error means the ETF is good at mirroring the index. You should look for ETFs with very low tracking errors to ensure your returns will be as close as possible to the index performance.
Liquidity
Since they are traded on stock exchanges, trading volume becomes a big consideration before selecting ETFs. If the ETF you invest in has low trading volume, you will find it difficult to buy or sell units at a fair price. Be sure to always check the average daily trading volume before starting an SIP.
INAV
ETFs publish INAV (Indicative Net Asset Value) every 10 to 15 seconds. This value helps you track whether you’re buying the ETF at a price close to its actual value. If there is a large difference between the INAV and trading price, you could be paying more than you should.
Expense Ratio
ETFs generally have lower expense ratios than mutual funds, but it is still important to compare fees among available options.
Taxation
ETF taxation depends on the fund’s underlying assets (equities, gold, debt) and the investment’s holding period. You should understand the tax implications of your investment before starting an SIP. A tax consultant can help you minimise capital gains tax while keeping you compliant with the law.
Not Widely Available
While many brokerage platforms offer ETF SIPs, the facility is still not as widely available as mutual fund SIPs. If you are a first-time investor, it’s a good idea to consult a financial advisor in kerala or any other part of India to make the entire process simpler and more effective.
Future of SIP in ETFs in India
Even though the first ETF in India was introduced in 2002, the government recognised it as an asset class for broader public investment only much later in 2013. Due to this government endorsement, ETFs have seen a significant rise in the country. By December 2023, the total AUM in ETFs in India had reached around Rs. 6.5 lakh crore, showing how much interest they’ve gained over the years. Many experts believe the future of ETFs is very promising.
That said, as far as sip in etf is concerned, there is still some way to go. The number of platforms offering this facility is currently limited, and the features may vary widely. Also, not all ETFs have sufficient liquidity, which can make it harder for investors to invest in this space confidently. However, as awareness and demand for ETFs grow, more brokers will likely start offering simpler and automated ETF SIP options. Until then, if you’re unsure how to start, it’s best to seek help from a registered investment advisor who can guide you through the process based on your financial goals and risk tolerance.
Conclusion
While Systematic Investment Plans are usually associated with mutual funds, some platforms have made it possible for investors to start an sip in etf. This gives investors the ability to combine the benefits of disciplined investing with the cost-efficiency of ETFs. While the use of this facility is not yet widespread, it is expected that its popularity will grow as more people become aware of ETFs as investment vehicles and more brokerage platforms allow for easier automatic investments.
FAQs
What is an ETF SIP and how does it differ from mutual fund SIPs?
An etf sip is a facility offered by some platforms which allows investors to automatically buy ETFs regularly. They differ from mutual fund SIPs in the following ways:
- Investors must buy full units of ETFs, unlike mutual fund SIPs, where a fraction of a unit can be allotted.
- ETF SIPs require a demat account, while mutual fund SIPs do not.
- Investment in mutual fund SIPs is done with a fixed amount, for example, Rs. 5,000 per month. Generally, with ETF SIPs, you purchase a fixed number of units, not invest a fixed amount.
How can I start an ETF SIP online?
To start an ETF SIP, you’re going to need a demat account with an online broker platform that offers the ETF SIP facility. Once set up, you can choose the appropriate ETFs and select the quantity, frequency, and the timing of purchase.
Is SIP in ETF safe for long-term investing?
Since equities tend to perform best over the long term, SIP in ETFs that track indices like NIFTY 50 and NIFTY Next 50 can be a safe strategy for long-term investing. These products do carry market and liquidity risks, so you should ideally consult with a qualified advisor before investing in them.
Can I do SIP in any ETF listed on NSE or BSE?
Yes, if your brokerage platform offers the ETF SIP facility, you can invest in NSE or BSE ETFs.
Which platforms allow SIPs in ETFs in India?
Platforms like Zerodha and Groww offer ETF SIP facilities, but you should always verify whether or not a particular platform supports automatic ETF investments.
