The same can be true for equity investments. Creating and managing your portfolio can be equally useful, but investing in a fund can make your job easier. Exchange traded funds or ETFs are one of the options you can consider here. Read on to know more about exchange traded funds and the benefits of investing in them.
What is ETF?
ETFs There are funds that track a particular index. For example, an ETF that tracks the Nifty 50 will have a portfolio that is very similar in composition to the index. This allows you to benefit directly from the growth of the index at similar levels.
In many ways, an ETF is similar to a mutual fund, but there are some differences between the two as well. But first, let’s look at the similarities.
Similarities
ETF is a type of mutual fund. Here too, there will be a fund manager who collects money from different investors and aims to maintain a portfolio as per the fund’s theme.
ETFs
Indexes can be portfolios similar to mutual funds that are also designed to track the composition of the index.
Difference
The main difference between ETFs and mutual funds is the management style. Most mutual funds are actively managed. This means that the fund manager can continuously monitor and modify the portfolio for better performance. But in the case of ETFs, since the fund tracks an index exactly as it is, it is only passively managed. Instead of manually selecting securities through research, in ETFs, the fund manager makes changes only when the composition of the index changes.
In addition, the units of the ETF are tradable on the stock market. This means that you can trade their units with shares, whereas the units of a mutual fund cannot be sold to any other investor.
Types of ETFs
there are many types
ETFs
For you to choose from, including the above equity ETFs. Let us look at them in detail.
Equity ETFs
Equity ETFs are funds that follow stock market indices like Nifty and Sensex. They also happen to be the most popular ETFs. There are equity ETFs that track different sectors as well. For example, an FMCG ETF will track an FMCG index like Nifty FMCG.
Fixed-Income ETFs
They are funds that invest in fixed income securities such as bonds, loans, etc. Since these are not market-linked, they are more suitable for conservative investors.
Commodity ETFs
As the name suggests, these ETFs track the prices of various commodities like gold, silver etc. Thus, investing in commodity ETFs becomes a good way to diversify your portfolio by incorporating different asset classes. Diversification can help balance your portfolio, and can also help reduce the risk associated with investing.
currency etfs
Currency ETFs invest in various currencies around the world. ETFs invest either in a single currency or in its basket. These ETFs help investors participate in the money market without actually buying the currencies. Like commodity ETFs, reserving space in your portfolio for currency ETFs helps with diversification.
How to choose ETFs to invest in?
Now that you understand what an ETF is and what types of ETFs you can choose from, let’s look at a few pointers that will help you choose from them.
expense ratio Expense Ratio is a charge which is charged by the fund house to you for the maintenance of the fund. This is usually a percentage of the corpus. If you choose to invest in a fund with a lower expense ratio, you will be charged less.
tracking error Even though ETFs track one index, the development of the two can differ. This is known as tracking error. This is mainly because of the expense ratio but there can be other reasons as well. It is important to look at the tracking error of an ETF, because most of the time, when you invest in an ETF, you are investing in the index itself.
liquidity Liquidity is another important parameter to watch. Since ETFs are sold and bought on the stock markets, you may want to invest in an ETF that has a substantial demand.
your investment horizon Last but not least, you should invest in a fund that aligns with your investment goals and risk appetite. You can talk to your investment advisor to help you figure out your investment horizon and find a fund that matches it.
ETFs To benefit from the developments of the stock market can be an investment option. Do your research and invest early to get the most out of it.
Mutual fund investments are subject to market risks, read all the documents related to the scheme carefully.