Understanding ETFs: Exchange Traded Funds
Smart Money February 8, 2023
Team LXME
Equity is one of the popular asset classes that deliver inflation-beating returns in the longer term. Let’s understand the avenues through which you can invest in Equity Markets.
You can invest in equity through various means such as directly investing in stocks through a Demat account, Equity Mutual Fund, ETFs, and PMS (Portfolio Management Service).
Investing directly (which requires expertise and adequate knowledge about the equity market) and through equity mutual funds is very common through which investors invest in the equity market. While PMS is a wealth management service, in which generally, high net worth individuals with a minimum investment amount of 50 lakhs can avail of this service.
Now, let’s learn about ETFs in detail,
What is ETF in the Stock Market?
– To start investing in ETFs, first, let us understand what’s an ETF. ETFs are Exchange Traded Funds that are traded on stock exchanges like any other stock.
– There are various types of Exchanged Traded Funds, generally passively managed funds i.e. ETFs track a particular index and try to mirror the returns of the same index subject to tracking error (Tracking error is the difference in the actual performance of ETF and the performance of the index it is tracking)
–Advantages of ETFs include diversification like mutual funds as various stocks are listed on that index.
– ETFs share the features of mutual funds as well as stocks such as they are similar to index funds and are listed on stock exchanges and can be traded like any other stock.
– ETFs pool the capital invested by the investors in various asset classes like shares, bonds, etc. These funds track the indices and reflect similar returns to benchmark indices.
– These have lower expense ratios as these funds are passively managed where there is no need for professional management. However, the commission is also charged on trading ETFs as you trade through a Demat account.
– In India, there are 161 ETFs (11 Gold ETFs and 150 other ETFs (which track various equity and debt indices)) as per the data of the Association of Mutual Funds in India (AMFI) as of 31st Dec’2022.
Who should invest in ETFs?
– If anyone wants to invest in indices such as Nifty 50, BSE Sensex, or any other index and want to earn returns similar to indices.
– Investors who have an understanding and knowledge of the equity market and can analyze the best-suited ETF for themselves.
– Investors who want to enjoy the benefit of diversification and want to be able to buy and sell whenever they want at real-time prices at little amounts.
– Investors who want liquidity.
Difference between ETFs and Mutual Funds
| ETFs Vs. Mutual Funds | ||
| ETFs | Mutual Funds | |
| NAV | Can be bought and sold on real-time NAV | Can be bought and sold on closing NAV |
| Fund Management | Passively managed | Actively as well as passively managed |
| Expense ratio | Low | Low to high |
| Trading Commission | Commission is charged on trading ETFs (As you invest through Demat account) | Commission is not charged on buying and selling |
| Demat account | Required | Not required |
| Minimum Investment Required | As per the price of one unit of ETF | Rs.100 |
Before investing in any of the investment instrument, investors should assess their risk profile, financial goals, time horizon, needs and accordingly, select the best-suited investment options for them. Invest in equity instruments with a longer-term perspective with an aim to earn inflation-beating returns and don’t get worried about short-term market movements. Always remember to diversify your investments across different asset classes to manage the risks and optimize the returns!
If you wish to invest in ETFs, then make sure you understand how they work, and before taking an investment decision, ensure that it matches your goal. If you’re a beginner and want to get started on your investment journey, Mutual Funds are a great way as you can start investing with just Rs.100/-, you get the benefit of professional fund management, and when you’re investing via SIP, you become a disciplined investor!!
Check out the LXME app and click on the INVEST tab to explore expert-curated mutual fund portfolios, wherein you can start your investments with just ₹100 whether you want to invest in equity, debt, or gold.
FAQs: Benefits of Investing in EFTs
What is an ETF fund, and how does it work?
An ETF is an investment fund with a diversified portfolio of assets, such as stocks or bonds. It trades on stock exchanges, allowing investors to buy and sell shares throughout the trading day. ETFs aim to track the performance of a specific index or asset class.
How do you make money from ETFs?
Investors can make money from ETFs through capital appreciation and income generation. Capital appreciation occurs when the ETF’s underlying assets increase in value. Income is generated through dividends or interest payments from the assets held in the fund. Advantages of EFTs include making a profit by trading ETF shares on the stock market at a price higher than their purchase price.
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