Taking the conversation further, the founder and chief executive officer of Capital Mind, Deepak Shenoy, pitched in a lot more perspective to the thread.
“Indeed and in fact the tax advantage is why ETFs shine in the US. Redeeming ETF units in exchange for the underlying shares, what market makers generally do, is not taxable for the ETF, it’s like a buy back of sorts,” he said.
Mutual funds in the US though, when sold, record capital gains for all unitholders. Investors are then sent a tax note stating that taxation applies for US citizen unit holders.
Shenoy goes on to list three ETF advantages that remain in India:
The first one is the fact that ETFs can be used for intraday buying during a steep fall. Investors need to note that this does not work on days like election results day, when the markets were down 6% last time.
Secondly, ETFs can have any investor owning more than 25% of all units, which is a restriction in a mutual fund.
“That is an advantage for say EPFO owning nearly all of the SBI Nifty ETF for example. Normal people don’t care about this, of course,” he said.
For the final advantage, Shenoy said that ETFs don’t pay securities transaction tax when buying or selling stocks.
He, however, said, “There isn’t that much of an advantage in India for ETFs over index funds, though the STT advantage is meaningful over a holding period of a decade.”