Diversify Your Investments With Exchange -Traded Funds: Explore ETF Types

In our busy lives, we all want things to be simple and efficient. When it comes to stock market investing, many of us look for ways to manage risk without too much hassle. Do you know? There exists such a strategy that can help you invest in a range of assets without needing to become an expert in each one. Exchange-traded funds offer a modern solution for investors in India. They blend diversification benefits with the ease of trading.

Now, what exactly is ETF trading, and what are the different types of ETFs you can choose from?

ETF Trading – Exchange Trading Funds

An ETF fund is a type of investment that you can purchase and sell on a stock exchange, just like individual stocks. 

ETFs can track:

• An index (like CNX Nifty or BSE Sensex)
• A commodity
• Bonds
• A mix of assets (similar to index funds)

The value of an ETF stock is based on the underlying assets it holds. ETF trades throughout the day at market prices

Let us say that you want to invest in different companies or assets, but you don’t want to pick each one individually. In that case, an ETF lets you buy a share of this “basket,” .

Why should you invest in ETFs?

1. When you invest in an ETF, you get a chance to invest in a variety of assets. This helps spread out your risk.
2. ETFs often have lower fees as compared to mutual funds. 
3. Since ETFs are traded on the stock exchanges, they are flexible in nature.

Now, invest in ETFs at zero brokerage!

How Do ETFs Work?

Exchange traded funds bring you the benefits of mutual funds and stock trading. They offer diversification by pooling together various assets. This decreases the overall risk associated with investing in a single security. 

• ETF Trading: ETF stocks are traded on stock exchanges just like regular stocks. This means their prices fluctuate throughout the day based on supply and demand.
• Price: The value of an ETF is linked to the net asset value- NAV of the underlying assets it holds.
• Liquidity and Fees: ETFs usually offer higher liquidity and lower fees compared to mutual funds. This makes them a cost-effective option for many investors.

To invest in ETFs, you need two key accounts: a Demat account to hold your securities and a trading account to execute your orders.

Open a free demat account now!

Passive Management of ETFs

ETFs are known for their passive management style. The goal of an ETF is to match the performance of a specific index rather than trying to outperform it.

Fund managers make only occasional adjustments to keep the ETF aligned with its index. They don’t actively buy or sell assets to try and beat the market.

In contrast, actively managed funds, like many mutual funds, involve fund managers who continuously trade assets to try to outperform the market.

Cost Efficiency

One of the biggest advantages of ETFs is their cost efficiency:

• Lower Costs: ETFs typically have lower administrative costs compared to actively managed funds. While the cost for ETFs is usually under 0.20% per year, actively managed funds can cost over 1% annually.
• Expense Ratio: Lower fees mean more of your money goes into your investment rather than covering fund expenses.

Types Of ETFs In India

In India, ETFs (Exchange-Traded Funds) offer a range of options across different asset classes.

1. Equity ETFs

These are the ETFs that track stock indices, such as Nifty 50 or Sensex, or sector-specific indices.

2. Gold ETFs

These are the ETFs that invest in physical gold and aim to track its price.

3. Bond ETFs

These type of exchange traded funds invest in government or corporate bonds.

For example- Bharat Bond ETF, SBI ETF 10 Year Gilt, etc.

4. Sector ETFs

This includes the ETFs that focus on specific sectors such as banking, technology, or healthcare.

5. International ETFs

ETFs that invest in foreign markets. These ETF stocks offer you exposure to global indices.

6. Currency ETFs

Such ETFs track the performance of foreign currencies against the Indian Rupee.

These are less common but available for those seeking currency exposure

Exchange-Traded Funds (ETFs)| Pros and Cons

ETFs offer a way to invest in a diverse range of assets while keeping costs lower.

Pros of ETFs

1. ETFs let you invest in a variety of assets with a single security. This helps spread risk across different investments.
2. They generally have lower expense ratios compared to mutual funds, which means you pay less in management fees.
3. They are often more tax-efficient than mutual funds, which can be beneficial for your overall returns.

Cons of ETFs:

1. ETF prices can fluctuate during the day, which might be a concern if you’re looking for stable investments.
2. ETFs might not always perfectly track the performance of their underlying index, leading to potential discrepancies.
3. There are fewer ETF options compared to mutual funds, which might limit your choices.

How To Invest In ETFs

Here’s a step-by-step guide to getting started:

1. To buy and sell ETFs, you’ll need both a Demat account (to hold your ETF shares) and a trading account (to execute transactions).
2. Research various ETFs to find one that aligns with your investment goals.
3. Use your trading account to place a buy order for the ETF. You can do this through an online trading platform during market hours.
4. You must regularly check your ETF stock. 

How Do ETFs Derive Their Liquidity?

ETFs are known for their liquidity, but how exactly does this work?

Investors trade ETF units with one another throughout the trading day. This active trading on the secondary market contributes to the ETF’s overall liquidity.

ETFs use a unique process called in-kind creation and redemption to maintain liquidity.

• Authorised participants (APs) can create new ETF shares by delivering a basket of the underlying securities to the ETF provider.
• This process ensures that the number of ETF shares can be adjusted based on market demand.

• The liquidity of an ETF is closely tied to the liquidity of the underlying shares it holds.
• Since ETFs are composed of underlying securities that are themselves traded in the market. The ease of buying and selling those securities affects the ETF’s liquidity.

ETF Trading Tips

ETFs offer a cost-effective way to diversify your portfolio while enjoying the flexibility of stock trading. 

1. You must always use limit orders rather than market orders. This lets you control the price at which your trade is executed and helps avoid unexpected price changes. 

1. You must ensure that the assets in your ETF is open when you trade. This ensures better liquidity.
2. The first and last 30 minutes of the trading day can be volatile. It’s wise to avoid trading during these times to minimise price swings.
3. ETFs are a great way to diversify your investments across various sectors, asset classes, and regions. 
4. You must always know what assets the ETF holds and how it tracks its index.

These tips can make your ETF trading more effective.

Conclusion

ETFs offer a simple, cost-effective way to invest in a broad range of assets or indices. By pooling different securities, they help diversify in portfolio diversification. With different types of ETFs available, you can certainly choose the one that suits your investments goals. 

FAQs| ETF Funds

Source: AMFI

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Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.