ETFy Your Investments5 min read
What if I said you could buy and sell Mutual Funds in the same way you trade in the stock of a company…. Interesting, right ?
Yes, that’s true. ETFs, or Exchange Traded Mutual Funds are listed mutual funds that can be bought/ sold on Stock Exchanges like the NSE, BSE in India.
The seller/ buyer can be any investor and trader like you or me unlike in a traditional mutual fund where we buy and sell ( redeem) mutual funds via the AMC ( Asset management company)
So what’s the mojo for me?
Only because a Mutual Fund is traded on an exchange, does it give any benefit to you as an investor.
Well let’s explore the world of ETF and see whether you really ‘ETFy’ your investments
First lets understand how an ETF is formed and listed
Any AMC ( Asset Management Company) if they want to launch a fund comes out with an NFO, every fund has an investment objective, asset classification, risk parameter and benchmarking
Now in case of an ETF the fund collected during NFO period is retained till the end of the life of that ETF, which simply means that no further investor is added by AMC in future, in fact for the purpose of entry and exit or liquidity the fund is listed ( like a stock) in Exchanges for the investors to manager their entry and exit
So, whenever you buy an ETF the price paid by each individual can/may vary as the price is market driven, this also creates a risk of liquidity ( where no or very less buyer/seller is available), that also makes it a risky asset due to price deviation and loss of opportunity cost
Unlike in a open ended mutual fund where the price for each individual for that particular day is same which is NAV of that Mutual fund scheme for that day
Are there any different categories of ETFs in India ?
Oh great this questions implies that you have till now understood the concept of ETFs and how they are formed and listed
Yes there are few categories of mutual fund in india, lets explore them-
- Equity ETF: All those ETF which primarily invests in Equity and equity related instruments they normally invests like a mirror property of its underlying index or the index it replicates some common Equity ETFs are Nifty BEES, ICICInifty, Kotak nifty, KotakBnifty, M100, CPSEETF, InfraBEES, PharmaBEES.
- Debt Based ETF: These ETFs are used as an investment vehicle when the objective is to earn from debt instruments or a less risky asset class with fixed coupon earnings. LiquidBEES is the oldest and India’s most traded ETF which is used to park short term funds and give returns near to liquid mutual funds, Bharat bond ETF, IPRU GSEC ETF are major Debt ETFs in India.
- Commodity ETF : These ETFs off late have become quite popular, especially when silver got added to the ETF family of investment vehicles in india, these ETFs fulfill the financial goal of diversification and asset allocation to an some what Equity inversely linked Instrument such as GOLD ETF, GoldBEES being the most common Gold ETF, other being axisgold, kotakgold, iprugold, iprusilver, SilverBEES etc.
- International ETFs : Now an Indian investor can take exposure in a global company via ETFs too, thanks to the International or Global ETFs launches in India, which give exposure to US, Asia, European, Japanese companies, giving a perfect feel of a global portfolio. Ex: MOSL NASDAQ 100, HDFC World Index Fund, Mirae Asset NYSE FANG+ETF.
Which ETF is best suited for you ?
Well buying an ETF could have different objective, let me discuss some here for you to get a better idea on choosing the best ETF for you-
- Financial Goals : Although only ETFs are not recommended for achieving financial goals of an individual but yes, an ETF along with Mutual fund adds a good value to the portfolio and financial goals fulfillment. Like Index funds can be used for retirement goals, liquid or Debt funds to be used for short term goals , Gold or Silver ETFs for Child marriage goal etc.
- Deep Value : Normally a Fundamentally sound stock falling below 200 Day moving average is considered a good opportunity to enter, same can be done with an ETF as it is a traded instrument, limit orders can be put at the appropriate price to enter or even book profits.
- Averaging Investments: As ETFs are exchange traded one can easily set triggers or GTD orders in ETFs, especially financial goal linked investments to take the benefit of a panic fall in the price of an ETF.
- Dual benefits of investment and Trading limits: If you actively trade in stock or derivative markets, your ETFs can act as a collateral for getting trading limits and even margin funding to help you trade and solve your liquidity issues for trading.
So now you are well versed in the concepts of ETFs, their differentiation from mutual funds, and how to choose an ETF.
In a nutshell, an ETF is a very good instrument to invest in that helps fulfill your financial goals while also providing other benefits like a stock. But ETF should always be considered as supplementary investment options along with Mutual fund and other investments
Happy Investing !
Written By- Ashish Andani
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