What is PSU Bank ETF?

With the advancement of the securities market in India, a plethora of products have been introduced recently. Exchange-Traded Funds is one such product that has gained popularity. ETFs are hybrid instruments that bear resemblance to both mutual funds and equity shares. They are a popular investment avenue for amateur investors with some degree of experience in the financial market. The mechanism, benefits, and challenges of ETFs, particularly PSU Bank ETF are discussed below.

What is PSU Bank ETF?

Before delving into the meaning of PSU Bank ETF, let’s understand the structure and trading mechanism of an ETF. Exchange-Traded Fund is an investment avenue and its principal holding is in assets such as bonds, stocks, securities, or a combination. Most ETFs are benchmarked to a certain index, sector, commodity, or asset and can be traded on an exchange like common stock.

A PSU Bank ETF primarily invests in constituent securities of a PSU Banks Index. They are registered with the Securities and Exchange Board of India (SEBI) and widely traded on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

Most PSU Bank ETFs are open-ended funds that can issue and redeem units at any time. Over the years, investment in PSU Banks has been considered moderately risky. Naturally, investment in PSU Bank ETF is categorized as “Moderately High” and “High”. Thus, an investor must evaluate one’s risk appetite before arriving at any investment decision.

While ETFs appear to be similar to Mutual Funds, there are some stark differences. ETFs may be traded anytime during the market hours whereas the trading hours for Mutual Funds are limited. Further, the valuation and pricing of ETFs are similar to shares, it is a function of demand and supply. The price of ETFs is updated on a real-time basis. On the other hand, Mutual Funds are traded following their Net Asset Value (NAV) which is calculated at the end of the trading day.

‘Creation Blocks’ or ‘Creation Units’ are a distinguishing factor for ETFs. Generally, ‘Creation Blocks’ help to reduce the delta between the market price and the NAV of the ETF shares. The difference is included in the returns on investment and passed to the customers.

ETFs, especially PSU Bank ETFs, actively track the traded market index. However, the frequency of portfolio rebalancing is not as high as a Mutual Fund. Hence, the overhead and management expenses are considerably lesser and the expense ratio is favorable. Additionally, ETFs do not levy any entry or exit load. Thus, ETFs provide to be a more liquid and less expensive investment opportunity.

How does ETF work? (Including PSU Bank ETF)

To understand the functioning of an ETF, let’s compare it to an Index Fund. An Index Fund emulates the performance of stock indices like BSE Sensex or NSE Nifty. The index fund consists of a portfolio of stocks or bonds which mimic the composition and performance of a financial market index.

Similarly, an ETF is designed to replicate the performance of the index, industry, or sector to which it is linked. A PSU Bank ETF is linked to the PSU Bank Returns Index (based on NSE and BSE performance) and invests in stocks that form a part of the Index. The ratio of investment is similar to the proportion of stocks in the Index.

Consideration factors of PSU Bank ETFs

Investing in PSU Bank ETFs requires careful consideration by any investor. Some of the essential factors to evaluate are as below:

1. Demat Account: A Demat account is a prerequisite to trading in PSU Bank ETFs. The investor may choose to trade through a broker or by himself. Investing through a broker entails additional transaction charges which may increase the cost of investment.
2. Tax Implications: In India, ETFs are subject to a Dividend Distribution Tax on the payment of dividends. Any sale or transfer of ETFs is subject to capital gains which may be short-term or long-term depending upon the period of holding.
3. Risk: Investment in ETFs is subject to market volatility. Thus, an investor must actively monitor market movements and the performance of the PSU Bank Index to maximize returns.

In conclusion, investment in PSU Bank ETFs is an attractive tool. However, the exposure is exclusively limited to PSU Banks. To diversify, one must consider investing in other sectors, companies, and industries to mitigate the risk involved.