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Exchange Traded Funds (ETFs)

Mutual Funds are usually the first choice for hesitant and cautious investors who want to create wealth and avoid making losses. There are no completely ‘risk-free’ investments, but there are less risky investments. Mutual Funds offer portfolios which can cater to all risk appetites and financial goals.

There are two ways to manage a mutual fund, actively and passively. Active management means you’re actively tracking your portfolio/s performance, a passive fund does not need continuous supervision. Most mutual funds are actively managed, there are some which are passively managed, of these the most distinct are Index Funds and Exchange Traded Funds (ETFs).

Index Funds are passive mutual funds which are tied to or track national securities exchanges, like BSE Sensex, NSE Nifty etc. The performance of an Index Fund must be close to or the same as the index it is tied to.

An ETF is like an Index Fund (but not the same), it is tied to a securities, commodities or metals, with the unique feature of being listed and traded actively on national exchanges. Investing in Exchange Traded Funds is becoming accepted and popular because it gives you, as an investor, the opportunity to invest in national and international securities. The biggest benefit and distinct feature of this fund type is, it gives you exposure to equities and other securities without the risk associated with active participation. Which also implies, though it is listed and computed as an equity product, it is essentially a mutual-fund.

ETF Plans Recommended by Angel BEE:

There are several Exchange Traded Funds available for you to invest in, here’s a summary:

  • Index ETFs: These are the most common ones and they monitor performance of an index and replicate it. Which means, these purchase all the stocks present in the benchmark index in the same proportion.

  • Stock ETFs: Stock ETFs introduce you to a pool of equities (in a sector or index) without the need to buy each stock directly.

  • Bond ETFs: These replicate returns of bond indices and are traded on a stock exchange. You get advantages like diversification, price transparency, ease of trading, high liquidity, and a monthly pay-out.

  • Commodity ETFs: These invest in commodities like silver, gold, and other precious metals.

  • Currency ETFs: Exposure to foreign exchange markets is the objective behind Currency ETFs. These are a cost-effective way in which you can trade in and track foreign currencies.

  • Actively Managed ETFs: Fund managers take decisions on the portfolio of underlying securities, like making changes in the allocations of sectors. Actively managed ETFs have a high expense ratio.

  • Inverse ETFs: Also known as Bear or Short ETFs, these are traded on stock exchanges and return inverse performance of the benchmark (of the index they follow). They function by making use of short selling, trading derivatives, and other investment techniques.

  • Leveraged ETFs: Exchange Traded Funds which use financial derivatives and debt to magnify the underlying index returns are known as leveraged ETFs. Owing to high associated risks associated, they are not ideal long-term investment options.

Top ETFs in India

ETFs are considered not only popular but also an innovative approach in mutual-fund investments. Investors consider these funds valuable because they circumvent the need to actively participate in markets. Most often it’s difficult to understand the pulse of the market to make buy or sell decisions for stocks, these funds are perfect alternatives.

The best ones are distinguished based on past performance, cost-effectiveness and rate or returns on investment. The most common parameters for picking the top choices are:

  • Liquidity: An ETF is traded daily on listed exchanges, which why it can be bought, sold or transferred any time. The best ones will have adequate liquidity to make them salable, especially when markets are in a slump.

  • Expense Ratio: The lower the expense ratio, the more cost-effective it is. This also means, it becomes attractive to buy or sell it.

  • Tracking Error: This comes in handy when you need to assess an Exchange Traded Fund’s performance. A high tracking error means your fund is not performing well, while a low tracking error shows great performance.

Everything You Need to Know About ETFs

Here’s why these funds are distinct from other mutual funds:

  • Can Be Traded Like Stocks: An Exchange Traded Fund can be tied to an index or a group of securities which trade on an index. This means, the NAV fluctuates according to the movement of individual securities.

  • Exposure to International Securities: With these funds, Indian investors can trade, and track securities listed on international exchanges as well.

  • Diversification: These funds give you access to securities, commodities, sectors and even metals. There are several types based on these compositions.

  • Mitigated Risks and Higher Returns: You get access to equities without the risks associated with active participation in the markets. The returns on investment are also proportional to security movements. There are great returns when markets are in an upward trend.

  • Cost-Effective: These are passively managed funds and because of historically high returns, they are an attractive investment option. These two factors result in relatively lower expense ratio. The lower the expense ratio of an investment, the more cost-effective it is.

Why ETFs?

  • Great Exposure: Exchange Traded Funds give you exposure to equity, debt, commodities and metals. You can invest in any of these funds without actively participating in direct trading. All you need to do is track your fund’s performance and get great returns on your investment.

  • Access to International Securities: These have opened the world of international securities and exchanges to Indian investors. It is one of the distinctive features of these type of funds and slowly becoming a preferred investment option.

  • Less Expensive and Great Returns: These funds tend to give higher returns in positive market movements, this brings down the expense ratio considerably. This ratio is one of the key factors in determining whether to sell or purchase.

  • High Liquidity: These funds need to be highly liquid because they’re traded continuously. They can be bought and sold at any time during a trading period. This is the only type of mutual-fund which is treated like a stock but is not actually one.

Get Better Returns with ETFs

Trading in Exchange Traded Funds gives you the advantage of getting the prevalent price. This means you can get possible lucrative trades through buying and selling. Moreover, trading in Index ETFs gives you the advantage of purchasing quality stocks. More often, investors prefer investing in these funds because they don’t need to actively participate in markets. Direct participation entails making timely decisions which sometimes might go awry, even after analyses or regular tracking of individual stocks. Market movements are unpredictable and trading directly in stocks means your risk and losses are huge when markets are in a slump. With these funds, you can mitigate market risks and reap exceptionally high returns. These funds are also tax-efficient, which means though they can be traded like stocks, the tax-treatment is like mutual funds. Buying these funds at low cost proves cost-effective especially when you can sell at higher returns.

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