Everything You Need to Know About Exchange Traded Funds (ETFs)

Exchange Traded Funds (ETFs) have become increasingly popular among investors due to their unique structure and benefits. In this article, we will explain what ETFs are and their advantages, as well as some popular classes of ETFs.

What are ETFs? 

ETFs are essentially mutual fund schemes or index funds that are listed and traded on the exchange like stocks. ETFs are priced continually and can be bought or sold throughout the trading day. Buying or selling ETFs is as simple as buying or selling any other stock on the exchange, allowing investors to take advantage of intra-day price movements. Another advantage of ETFs is that investors can buy even one unit and hence take exposure to the entire index at very low amounts.

Advantages of ETFs 

• ETFs offer flexibility in trading.
• ETFs can be bought or sold easily through a call to the broker or through an internet trading account.
• Investors can react swiftly to changes in the market and place limit orders while trading.
• ETFs can be held in your DP account with the other portfolio holdings.
• ETFs provide the benefits of both stock flexibility and diversification.
• ETFs are cost-effective for investors.
• Only brokerage commissions, management fees, and taxes are the costs for an investor.

Popular Classes of ETFs

Equity Index ETFs: Equity index ETFs are funds whose unit price is derived from a basket of capital market securities. These baskets of securities differ depending on the nature of ETF. For example, the value of NIFTYBeEs or UTISUNDER is derived from securities that comprise the NIFTY index. Equity index ETFs can be used to build a long-term core holding of equity by systematically investing in various index funds like Nifty ETF, Nifty Junior ETFs, Nifty Sharia ETF, Bank ETF, etc. Investors can also buy an Index ETF instead of doing individual stock picking if they are bullish on the market.

Gold ETFs: Gold ETFs are units representing physical gold, which may be in paper or dematerialized form. These units are traded on the exchange like a single stock of any company. Investors can use gold ETFs to keep gold as part of their portfolio, accumulate gold for social obligations, or buy gold ETFs and sell them to purchase jewelry or other forms of gold when they desire.

Liquid ETFs: Liquid ETFs are funds whose unit price is derived from money market securities comprising of government bonds, treasury bonds, call money market, etc. The fund seeks to deliver reasonable market-related returns with lower risk and higher liquidity through a portfolio of debt and money market instruments. Liquid ETFs can be used to park idle cash between two trades or can be used as cash equivalent margin for NSE Cash segment and Derivative segment with a 10% haircut.

ETFs vs. Stocks & Mutual Fund

ETFs offer unique advantages compared to stocks and mutual funds. Unlike mutual funds, ETFs can be traded throughout the day, providing investors with more flexibility in trading. ETFs also offer diversification, just like mutual funds. Compared to stocks, ETFs are cost-effective and provide investors with exposure to the entire index at low amounts.

In conclusion, Exchange Traded Funds (ETFs) are a powerful investment vehicle that can change the way you invest. With their flexibility, diversification, and cost-effectiveness, ETFs have become increasingly popular among investors. By investing in popular classes of ETFs like Equity Index ETFs, Gold ETFs, and Liquid ETFs, investors can benefit from the unique advantages that ETFs offer.

This is not investment advice. Investments in the securities market are subject to market risk, read all the related documents carefully before investing. Past performance is not indicative of future returns.