A detailed guide about Exchange Traded Funds (ETFs)
ETF or Exchange Traded Fund is a marketable security that tracks an index, commodity, bond, or a basket of securities similar to an index. ETFs track a particular index, such as BSE Sensex, NSE, Nifty, etc. Over the years, ETFs have gained immense popularity among investors because of their cost-efficiency and liquidity, especially in comparison to mutual funds online.
Here is a detailed guide about ETFs:
What are ETFs?
An ETF is a combination of securities traded on a stock exchange. This basket can include shares, bonds, derivatives, commodities, currencies, or a combination of these. ETFs pool money from investors, allowing them to buy a basket of assets without investing in each market security individually. This gives you diversified and low-cost access to a particular market area. The number of securities you buy represents your proportional interest in the overall ETF asset pool. ETFs are registered with the Securities and Exchange Board of India (SEBI).
How do ETFs work?
ETFs mimic mutual funds online in all aspects but have one difference. You can invest in an ETF from a brokerage account like you buy shares. This facility is not available when you buy mutual funds online.
Typically, an ETF provider combines different assets like stocks, bonds, commodities, etc., into one basket and links the basket with a unique market ticker, such as an index like BSE Sensex, NSE, etc. This basket has an intraday price and is up for trading on the stock exchange like a stock. As an investor, you can buy and sell the ETF any time during the trading day, unlike mutual funds, which you can trade only once a day. However, in an ETF, you do not own the underlying assets of the ETF.
How many types of ETFs are there in the market?
- Equity ETFs: These ETFs are linked to a specific set of equities like an index. These ETFs are less risky than stocks and are fit for long-term investors.
- Bond ETFs: These funds include investments in fixed-income securities, such as government bonds, treasury bills, corporate municipal bonds, etc. These ETFs do not have a maturity date and are ideal for investors who desire high liquidity.
- Commodity ETFs: These funds follow a defined commodity set like gold, crude oil, etc.
- Currency ETFs: These ETFs contain future currency contracts. You buy the currency of different countries based on their expected future performance, which decides your profits.
What are the benefits and drawbacks of investing in ETFs?
Benefits of ETFs
- Vertical and horizontal diversification. You can choose ETFs as per stocks, commodities, bonds, etc., or invest in sector-specific funds like health care, etc.
- Unlike mutual funds online, you can buy and sell ETFs any time of the day.
- ETFs are more tax-efficient than mutual funds online. You pay capital gains tax, but the ETF fee is lower than mutual funds.
Drawbacks of ETFs
- ETFs result in huge trading costs and commission charges for small and frequent investors.
- Technical discrepancies can create a flaw in tracking index prices of funds.
- Moderate diversity of funds because ETFs generally invest in best-performing securities.
Overall, you can consider investing in an ETF if you have a low-risk tolerance. Alternatively, you could invest in mutual funds online through the SIP (Systematic Investment Plan) route to minimize your risk while benefiting from the high mutual fund returns.Use the Tata Capital Moneyfy App to research, invest and track mutual funds online.