Exchange Traded Funds for India

India Exchange Traded Funds, ETFs, may be aptly described as a combination of equity shares and mutual funds. They may be compared to equity shares as they are traded on stock exchanges. They also resemble mutual funds as they consist of a set of specified stocks and commodities, including gold.

Role of ETF

There is no denying that ETFs are by far less popular than the traditional mutual funds to which a greater number of investors flock. This may presumably be due to the lack of awareness of the existence of ETF or the more likely reason - the improper understanding of ETF by the average investor.

ETFs generally track indexes. For example, the Nifty or the Bankex are tracked with ETFs. As a result, the return s narrowly confined to the rise in the index figure. The steadily growing population of retail investors in India, who want to quickly build wealth, is much more interested in the non-index shares, where the earning potential greater. This is the prime cause for ETFs failing to catch the investor’s eye.

There are, however, some positive aspects of ETFs. At times when market is over-valued, it will be nearly impossible to beat the index figures. Then index-based conventional mutual funds and ETF will decidedly be a more attractive bet than actively-managed funds. It is also important to remember that gold ETFs, and real estate ETFs, are unique with no like product in the traditional MF sector.

ETF and Mutual Funds

  • ETFs are fundamentally index-specific and thus the portfolio is largely the same. On the other hand, portfolio of a traditional mutual fund will keep changing on a daily basis. Hence, it possible to know the ETF portfolio in advance and the portfolio of MF can be known only during the disclosures at the end of the month.
  • Stock exchange is the place where trading of ETF takes place and for that, an account of dematerialization (Demat Account) is a basic prerequisite. This is not the case with MFs that are essentially traded with AMC (Asset Management Company).
  • When the market starts, you can easily buy or sell ETFs like equity shares at prices which are deemed real-time. However, you can buy MF at net asset value (determined by closing prices).
  • A part of closed-ended fund (generally a unit capital) will not alter with trading. But that of an ETF can change and to that extent therefore, they are more like funds which are open-ended.
  • Like all standard MFs, ETF offers options and diversifications.
  • The striking advantage in ETF is it can stay fully invested as it need not hold a large cash balance to meet deliverance pressures like the MF.
  • ETF allows the investors to pay their share of costs whereas MF deduct costs from the net asset value.

It may be a good idea to invest in ETFs for long-term safe investment planning because they offer great flexibility when  compared to index funds. 

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