An exchange-traded fund is a 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 per the equity trading time. If the prices of the underlying asset fall or rise, the proportionate fall or rise should also be reflected in that particular ETF asset. An ETF tracks the Nifty or Sensex by holding assets in the same proportion. To buy the best ETFs in India, you must have a Demat account and then invest at your convenience.
Advantages of ETFs
Low cost
The stock allocation matches the indexes since ETF tracks the Nifty or Sensex. Passive management helps reduce the replacement costs for stocks and the costs involved in actively managing these investments.
Diversification
ETFs invest your money across broad market verticals such as stocks, bonds, commodities, and foreign currencies. Diversification helps investors to manage the risk associated with investment effectively.
Transparency
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
Unlike mutual funds that trade at the end of the market day, investors can buy or sell at any time.
Disadvantages of ETFs
High exposure
ETFs may consider some unattended investment assets that could carry certain risks that investors are unaware of.
Complexity
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 replicating such indices tend to miss the considerable growth potentials of small-cap companies.
High cost
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 do you 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 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.
