An Exchange Traded Fund is a type of mutual fund that trades on an exchange. An ETF is like a basket that contains bonds, shares, commodities, etc. It tracks an index and can be bought or sold as per the equity trading time. If the prices of the underlying asset fall or rise, the proportionate fall or rise should reflect in that particular ETF asset as well.
An ETF tracks Nifty or Sensex by holding assets in the same proportion as them. To buy the best ETFs in India, you first need to have a Demat account and then invest as per your convenience.
Advantages of ETFs
Since ETF tracks the Nifty or Sensex, the stock allocation matches that of the indexes. Passive management helps reduce the replacement costs for stocks and the costs involved in actively managing these investments.
ETFs, invest your money across wide market verticals such as stocks, bonds, commodities, and foreign currencies. Diversification helps investors to manage the risk associated with investment effectively.
Due to transparency, investors know what assets they are investing in since they are replicating the index. It also rebalances your investment if the underlying assets in the index change.
Easy to trade
Investors can buy or sell at any time, unlike mutual funds that trade at the end of the market day.
Disadvantages of ETFs
ETFs may consider some unattended investment assets that could potentially carry certain risks that investors are unaware of.
Some ETFs may be complicated to understand their portfolio structure, tax benefits, and associated risk.
Limited growth potential
Some indices have only large-cap companies such as Nifty50 and S&P BSE 100. ETFs that replicate such indices tend to miss on the huge growth potentials of small-cap companies.
Some actively managed ETFs may require the monitoring of experts and replacing the underlying assets; this adds up to the expenses, unlike passively managed ETFs.
How to invest in the best ETF finds in India?
Step 1: Open a trading account with a broker
Step 2: Open a demat account
Step 3: Complete your KYC compliance and other formalities and agreements
Step 4: Look through your broker’s website for a list of available ETFs
Step 5: Choose the ETF that best fits your investment objective
Should you invest in ETFs?
As an ETF investor, you can focus on a particular asset class, industry, etc., with a ‘buy & hold’ perspective in mind that may help you earn attractive returns. Deciding on Exchange Traded Funds should also depend on your overall financial objective and appetite for risk.
Plan your finances under expert guidance to make the most of your ETF investments today.