All About Exchange-Traded Fund (ETF)

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To begin, an ETF (Exchange-Traded Fund) is a type of mutual fund. Like a mutual fund, it pools money from various investors, has a fund manager and a Net Asset Value. An ETF, on the other hand, has two distinguishing characteristics that set it apart:

  • ETFs, like stocks, can be exchanged on a stock exchange (in the secondary market)
  • It is a passively managed fund that follows an index and has become one of India’s most common passive investing types.

Nifty BeES, India’s first exchange-traded fund, monitors the success of the Nifty 50 Index. As a result, the fund manager purchases stocks from the Nifty 50 index to match the index’s returns.

ETFs, including bonds, are traded on a stock exchange. Investors may exchange them like stocks, and the price of each ETF unit is dictated by market demand and supply rather than the NAV. To trade in ETFs, they must first open a Demat account and a trading account.

Categories of ETFs

ETFs can be classified into four categories:

1. Equity ETFs: These exchange-traded funds follow the output of stock indexes or a group of stocks from a specific industry or business. The aim is to invest in stocks that will replicate the success of the index or sector.

2. Gold ETFs: Investing in gold is thought to be a good way to protect oneself from currency fluctuations and economic downturns. On the other hand, investing in physical gold has several disadvantages, including stability, cost, resale, and taxation. Gold ETFs are exchange-traded funds that invest in gold bullion and enable investors to include gold in their portfolio without investing in physical gold.

3. International exposure ETFs: Some ETFs are based on international stock indices. They give investors access to foreign markets and allow them to participate in those economies’ growth stories.

4. Debt ETFs: Fixed-income securities are the focus of these exchange-traded funds.

Why Should You Invest in ETFs?

An ETF is a great way to invest in stocks and diversify your portfolio. When you invest in stocks, you can only buy a certain number of stocks depending on the amount of money. As a result, picking the right stocks is critical. When you invest in an ETF that monitors a sector or asset class, you gain exposure to a wider variety of securities, allowing you to diversify and strengthen your portfolio. The following are some of the advantages of investing in ETFs:

  • ETFs, like bonds, are readily exchanged on stock exchanges.
  • Since units are exchanged at market prices dictated by investor sentiment, you will benefit if the market view of the sector or market that the ETF monitors is favourable.
  • Unlike mutual fund units, which must be redeemed at set times to take advantage of the current NAV, you can buy and sell units at any time during the day.
  • An ETF’s cost ratio is typically lower than that of most traditional mutual funds (especially actively managed mutual funds).

Remember that understanding the investment choices available and working on an investment strategy focused on financial targets, time horizon, and risk tolerance are the hallmarks of a good investor. Before you start looking for an ETF to invest in, make sure you have a policy in place and understand how ETFs function. Since these funds are actively managed, they aim to approximate the index’s returns rather than outperform them. As a result, keep your goals reasonable.