SIP in ETF: Benefits, Challenges, Popular ETFs

An SIP in ETFs may be a good option to diversify your portfolio. Systematic investment plans (SIPs) are a way to invest in exchange-traded funds (ETFs), and you can invest a fixed sum of money at regular intervals. The entire service is automated, and you do not have to worry about missing out on installments. Other advantages include the flexibility to invest or exit as per your preferences and relative affordability in comparison to many other investments. 

What is SIP in ETFs?

The definition of an SIP in ETFs is using systematic investment plans to invest in exchange-traded funds. ETFs can be perceived as a basket of multiple assets or securities, including bonds, shares, and so on. They are traded on the stock market and aim at tracking one particular index, like the Sensex or Nifty 50. Just like SIPs in mutual funds, you can also use them as a means of investing in ETFs. 

It works through investing a fixed amount on a regular basis (most people usually choose the monthly system), and you will have complete flexibility in terms of entering or exiting these investments. You should also know the differences between ETFs and index funds, with the latter trading only once each day after the market closes (at the NAV of the fund). ETFs trade throughout the day on exchanges, and their prices fluctuate with market demand and supply.  ETF SIPs may be a good way to build a sizable corpus over time.

Is SIP Possible in ETFs?

ETFs are traded in the manner of stocks, although multiple brokerages in India now provide SIP facilities for these investments. Hence, you can now choose SIPs for investing in ETFs in a more disciplined way without worrying about timing the market properly. Every installment of your investment will be used to buy ETF units based on the current market price, thereby giving you the advantage of rupee cost averaging. 

SIPs in ETFs fuse the advantages of lower costs, passive investing, and diversification, with easy automation of your investments. You can begin investing with smaller amounts and stop/pause anytime you feel. Hence, there is total control over your investments in this method. 

How Does SIP in ETFs Work?

Setting up an SIP in ETFs is an easy affair. It usually involves the following steps: 

• You will have to first choose the type of ETF to invest in. This will depend on your appetite for market risks, global developments, market conditions and other factors. 
• The next step is choosing a brokerage or investment platform to start an SIP. You will have to confirm whether the brokerage offers SIP facilities for ETFs or not. 
•  You can then set the payment frequency for your SIP and the amount for the same. 
• Set the auto-debit feature to bypass worries about missing your installments. 
• Keep tracking the performance of your ETFs, maintaining a focus on balancing risks and rewards. 

Benefits of Doing SIP in ETFs

There are several advantages of opting for an SIP in ETFs, including the following: 

• Easy Diversification- ETFs help you diversify your portfolio by holding several investments under a single umbrella. You can get exposure to diverse securities, regions, and sectors without having to pick stocks individually by yourself.
• Disciplined Investments- They help you invest in a more disciplined manner and build wealth steadily over the long haul through compounding. 
• Rupee Cost Averaging- You can automatically purchase more ETF units at affordable prices and a lower number of units at higher rates. This averages out the purchase cost over a period of time and helps you benefit from what is known as rupee cost averaging. 
• Highly Accessible- There is no need to lock in larger amounts of money at one go, and you can easily invest through installments over time. The minimum amounts are on the lower side, making these investments accessible for everyone. 
• Lower Costs- ETFs are also passively-managed and hence the expense ratio is lower in comparison to other funds (including mutual funds). Since they trade on stock exchanges, there are no worries about added charges and front-load fees, which are usually seen in mutual funds.
• Flexibility and Liquidity- You can easily buy and sell ETFs on exchanges during market hours. They do not have the limitations of lock-in periods like mutual funds. You can flexibly sell ETF units and enjoy higher liquidity at all times. 

Challenges and Things to Know

While an SIP in ETFs can be a good investment option, there are some challenges worth noting in this regard. Some of them include: 

• Portfolio Risks- There are various kinds of ETFs available in the market, which include global ETFs and a lot more. Choosing the right one is vital to bypass portfolio risks. Some other risks include geopolitical risks, counterparty risks, and sector-specific risks. 
• Brokerage Charges- Each time you purchase or sell ETF units, there are brokerage fees and other statutory costs (GST, STT) that you have to pay. These may add up gradually over time, particularly if you’re making a small investment or are a frequent trader. 
• Bid-Ask Spread- The difference between the highest price a buyer wants to pay (the bid) and the lowest price a seller is willing to take (ask) is important. Your effective selling or buying price may be affected by this spread, especially for ETFs that are not as liquid.
• Tracking Errors & Market Risks- ETF performance may not always mirror the underlying index owing to aspects like cash drag, expense ratios, and delays in portfolio reconstitution. At the same time, there are market risks to account for, where the ETF value may increase or decrease, depending on the performance of the underlying asset. 

Popular ETFs for SIP in India

Here are some of the popular choices for an SIP in ETFs: 

• Groww Nifty 50 Index Fund – ETF FoF- It is a popular ETF with the SIP facility and an expense ratio of just 0.30%. There is no exit load, and the minimum SIP amount is ₹500. The NAV of the fund is currently at ₹9.83. 

• Groww Nifty India Defence ETF- The fund offers a monthly SIP facility with the minimum amount being ₹500. The expense ratio of the fund is 0.21% while there is an exit load of 1% if you redeem within a period of 30 days. The fund size stands at ₹74.07 crore, and the NAV stands at 11.63. 
• Nifty 500 Momentum 50 ETF- It has an expense ratio of 0.20% with an exit load of 1% in case you redeem within 30 days. The NAV stands at ₹10.33 while the minimum SIP amount is ₹100. The fund size is ₹6.62 crore. 
• CPSE ETF (PSU Focused)- This fund has ₹35,998 crore of assets under management (AUM). The expense ratio stands at 0.07 for this fund. 

• Gold ETFs- It has an expense ratio of 0.51 while the assets under management (AUM) currently stand at ₹103 crore. If you were planning to invest in commodity ETFs, this is a good option. 
• Silver ETFs- The Groww Silver ETF FoF Direct Growth plan comes with an expense ratio of 0.18%. There is an exit load of 1% if you redeem within a period of 30 days. The fund size stands at ₹15.10 crore, and the NAV is currently 11.36. The minimum SIP amount for the plan is ₹500. 

SIP in ETFs vs SIP in Mutual Funds

So, what is the difference between SIPs in mutual funds and ETFs? Here are some basic differences that you should be aware of: 

• SIPs come with lock-in periods (or exit load fees if you withdraw early). ETF SIPs do not have these limitations. You can flexibly sell your units whenever you want. 
• You can invest in ETFs through intraday or real-time trading, while for mutual funds, it is the end-of-day NAV. 
• ETF costs are usually lower than mutual funds, while being more tax-efficient simultaneously.
• ETFs are passively managed with daily portfolio disclosures, while mutual funds are actively managed with monthly or quarterly portfolio disclosures.

Who Should Consider SIP in ETFs?

SIPs in ETFs are ideal options if you do not want to lock in a big amount at once. If you want lower costs and flexible intraday trading (and liquidity), they fit the bill perfectly. At the same time, along with affordability and flexibility, they also enable diversification and investment discipline alike. So, if you’re a beginner who doesn’t want to get into the intricacies of picking stocks, ETF SIPs may be a good option as well. They can help you compound and grow wealth over time. Of course, it goes without saying that you should also be open to some level of market risk. 

Conclusion

As you can see, an SIP in ETFs can be a good way to diversify your investment portfolio and gain exposure to multiple kinds of securities, regions, and sectors. However, you need to do your homework on the market risks and other challenges of these investments before finalizing your decision.