Beginners guide to ETF

• While mutual funds and stocks are popular among investors and traders, there is lower awareness about ETFs in the financial market.
• ETFs, or Exchange-Traded Funds, were conceptualised in the United States and first launched in 1993. This investment instrument has since become immensely popular in financial markets all across the globe. In the Indian context, the first ETF launched was the Nifty BeEs in 2002. Since its inception, it has witnessed a growth of over 1900% in terms of absolute returns. This ETF follows the ‘Nifty’ index.

• This article will discuss the meaning of ETFs, their classification and categorisation, compare them with other investment instruments like stocks and mutual funds, and explain their advantages.

  
  

  Key takeaways

• ETFs allow investors to gain exposure to a broad array of assets, mitigating risk and enhancing portfolio strength.
• ETFs can be traded throughout market hours.
• ETFs typically have lower fees compared to mutual funds, making them a cost-effective investment option.

Indian ETFs are essentially a variation of mutual funds. They have a unique set of differentiating factors. Like mutual funds, ETFs also collect investor money, have an assigned manager for your funds, and a net asset value. However, the differences are:

• Mutual funds are not traded on the stock exchange, but ETFs are
• ETFs can be considered passive mutual funds as they follow indices like Sensex or Nifty
   

With the meaning clear, let us now take the classification of ETFs:

Now, let us also compare Indian ETFs, mutual funds stocks, and mutual funds:

These are four primary categories of exchange-traded funds. These are illustrated in the table below:

Here are some major advantages of Indian ETFs:

• Diversification: ETFs offer wide exposure to various assets, helping strengthen and diversify your portfolio.
• Ease of trading: It is easy to trade ETFs through stock exchanges.
• Market-driven pricing: ETFs are traded at market value, which can help you benefit from favourable market conditions.
• Flexible timings: ETFs can be traded anytime during regular market hours.
• Lower costs: Typically, ETFs contain lesser cost ratios compared to mutual funds.

Indian ETFs have emerged as a powerful investment vehicle, offering a combination of the best features of stocks and mutual funds. ETFs provide investors with diversification, flexibility, and lower costs, making them an attractive option for those looking to invest in a range of assets.