Are ETF's the right investment for you?
Almost all of us want to invest our money, but not everyone has the required time for market study & analysis. Novice people who don’t know how to make their way into the world of investments, worry not we have your back. Wealth creation is important for each one of us but very few take the first step towards it. For a beginner, ETF’s can be your first-mover advantage. Let’s quickly get to know what Exchange Traded Funds (ETF’s) are all about.
SEBI defines An ETF: “is an open-ended scheme which replicates/tracks the particular index. Of the total assets, this fund must invest a minimum of 95 percent in securities of a particular index (which is being replicated or tracked)”.
In layman terms, ETF is a kind of index mutual fund because it replicates/tracks the particular index. ETF is not completely similar to mutual funds as there is no active fund manager involved in managing the funds. There are many more extra advantages of ETF over mutual funds that we’ll be covering. So, stay tuned till the end of the article & get to know more about it.
Different Types of ETF
ETF contains different types of securities such as stocks, bonds, commodities, gold, foreign currency & various other instruments. It also contains different types of index funds that they replicate. With all of these components, different types of ETF are available. Let us give a brief overview to make the process less complicated.
Index Funds ETF
An Index Fund ETF allows investors to purchase the same set of securities in the same proportion as the underlying index in a single transaction. This ETF tracks the performance of stock markets and gives you returns accordingly. Index Funds ETF are generally famous as they beat inflation in the long run & give the same approximate returns as the stock market.
Bond Exchange Traded Funds invests in bonds only. It consists of a portfolio of bonds that are traded on an exchange similar to stocks. This ETF is similar to bond mutual funds and they are passively managed. Few examples are Bharat Bond, LIC Nomura, etc.
Leveraged ETF uses derivates & debt to multiply the returns of the underlying index. A normal ETF tracks the stocks in its underlying index only but leveraged ETF may aim in tracking the securities in a 2:1 or 3:1 ratio. This ETF is not available in India as of now, but it is available for NASDAQ & DOW JONES.
Currency ETF provides investors exposure to foreign exchange currencies (forex). It allows them to invest in either a single currency or a basket of currencies. Currency ETF is also passively managed and allows investors to diversify their portfolios without the burden of placing single trades every day.
Gold ETF are the financial instruments that invest in gold and track gold prices. There are various advantages of Gold ETF’s over physical gold, get to know all about this financial product through our article Investing through Gold ETFs in a detailed manner.
A sector ETF tracks the particular industry or sector rather than the whole stock market and invests in the particular stocks of the sector. For instance, some of the sector-centric funds can be Automobile Funds, FMCG Funds, Pharma Funds, Technology Funds, etc.
Mutual Funds VS ETF
The tussle between Mutual Funds & ETF has been going on since the introduction of the latter financial product. Thus, it is very important to understand the difference between the two and decide your objective for choosing the financial product. Let us understand what differentiates these two products.
The management fees & expense ratio of ETF are around 0.5% - 1% of the invested amount which is very negligible.
Mutual funds expense ratio varies from 1% - 3% with extra added entry & exit charges which ranges from 2% - 5% of the invested amount.
ETFs can be bought from online trading accounts. It is similar to buying stocks and trading can be done during market hours. These funds are passively managed.
Mutual Funds can be bought through a broker, Asset Management Company (AMC), trading account. There is a dedicated fund manager allotted to a fund that takes care of the investors money.
The minimum investment in ETF can be as low as a single unit depending upon the price of a particular ETF.
Investment in Mutual Funds can be done in two ways either lump sum or SIP. It varies upon each mutual fund for the lump sum amount. Investing via SIP can be as low as Rs. 500 per month.
Capital Gains cannot be taxed on money made via ETF until the fund is redeemed. Investors who have invested in ETF with a long-term vision help their tax process easier.
Capital gains realized on mutual funds during a year are passed onto the shareholder whenever a taxable event arises.
First mover advantage in ETF Investing
If you are someone who has no time for analyzing different companies in stock markets and you want to invest your money & forget it for once and for all, here are some advantages that you can avail.
ETF helps in the portfolio diversification of an investor. The investment can be done without the heed of tracking the stocks regularly.
ETF does not have a lock-in period. One can buy & sell these funds as per your convenience as there is no maturity period involved.
ETF are cost structured funds. There are lower commission and management fees involved which encourages an investor to stay invested for the long term and reap good returns from the investment.
ETF are transparent funds as an investor can see the price & returns of their investment. Investment holdings are published every day which helps an investor to remain informed about their holdings.
Top Exchange Traded Funds available in India
There are various ETF’s available in India. We have collated some Top Performers ETF from different domains. To check the detailed performance of ETF’s you can head to Moneycontrol.com or the respective websites of these funds.
Risk in ETF
Risk is a factor that is present almost in every investment product. ETF provides diversification of securities, but there is a risk attached to it. The difference between the actual value of the Index Fund & the underlying ETF is called Tracking Error. Tracking error, market risk of investment are some of the things that you need to keep in mind before choosing any investment.
Every investment has its own set of advantages & disadvantages. An investor should choose a financial product carefully keeping in mind the goals, long-term investment plans, and based on the risk taking capacity of oneself.