scorecardresearchWhy should you invest in an exchange traded fund, or ETF? An explainer

Why should you invest in an exchange traded fund, or ETF? An explainer

Updated: 03 Sep 2023, 11:41 AM IST
TL;DR.

These are a category of mutual funds that can be traded on a stock market just like a security. An investor requires a demat account to be able to trade in them.

One can trade in these mutual funds in the real time basis on a stock market

One can trade in these mutual funds in the real time basis on a stock market

Before opting for a mutual fund, investors often face a dilemma as to which schemes to choose, and which ones to overlook. Although there are options galore when it comes to mutual funds, one category that investors are suggested to explore includes exchange traded funds.

Exchange traded funds, or ETFs, are a type of mutual funds that usually track an index or sector, and are traded on a stock exchange just like a stock.

Besides the key feature of being tradeable in a stock market, these funds are similar to a regular mutual fund. Since these funds trade on a stock market, investors require a demat account to transact in these funds.

There are a total of 180 schemes in this category (shows the AMFI data) with two broad categories i.e., gold ETF and other ETFs. There are 13 gold ETFs and 167 other ETFs. The former have a total assets under management (AUMs) of 23,329 crore and the latter have total AUMs of 5,54,108 crore.

Categories                  AUMs ( crore)
Gold ETFs                   23,329
Other ETFs                  5,54,108

(Source: AMFI, data as on July 31, 2023)

In fact, half a dozen new ETFs were launched in the month of July alone, mobilising a total of 122 crore. These funds were meant to track sectors and broader indices such as private banks, IT, PSU banks and Sensex.

Why should you invest in an ETF?

Diversification: Just like any other mutual funds, an ETF is a basket of securities and enables investors to get an exposure to a number of securities that are part of an index or sector which the ETF is meant to track such as Nifty, IT and banking, and so on and so forth. However, ETFs tracking gold do not necessarily give the benefit of diversification.

Trading in real time: Unlike other mutual funds, exchange traded funds trade in the real time on a stock exchange and the investor can invest or redeem his investment as and when he pleases. On the other hand, a mutual fund follows a T+2 settlement cycle which means it takes two days for a mutual fund transaction to settle.

Focused investment in a sector or index: An ETF usually tracks gold, index or sector, thus enabling investors to get exposure to that particular sector via a market tradeable fund. In other words, if you want to invest in a Nifty fund, you could explore the option of investing in a Nifty ETF.

Low-cost investment: ETFs carry a lower cost for investors since they are listed on an exchange, therefore, their cost of distribution is much lower.

 

 

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First Published: 03 Sep 2023, 11:41 AM IST