What Are Exchange Traded Funds?

Mutual funds are an extremely popular investment avenue for people in India. When it comes to mutual funds investment in India, investors generally prefer either equity, debt or hybrid funds. However, there is another category of mutual funds which is also an excellent avenue for investment; exchange traded funds. However, to understand about exchange traded funds, you need to understand the types of mutual funds based on their strategies.

When it comes to mutual funds investment in India, there are two types of investment strategies; active and passive. An actively managed mutual fund means the fund manager will actively adjust the strategy depending on market conditions and the performance of the assets that are invested in. On the other hand, there are passive mutual funds which do not adjust their strategy. They mimic the growth of the asset they track or invest in.

Exchange traded funds are mutual funds with passive investment strategy. These are the best mutual funds to invest now since they only mimic the growth of a particular asset like gold or an index.

In case of index funds, the mutual fund’s composition is the same shares that comprise an index in the same ratio. This means investing in a fund is like investing in one unit of the index itself. There are both Sensex and Nifty index ETFs available for investment and their growth is close to the growth rate of the index itself.

In this case, since the exchange traded fund only follows the underlying asset, the investment strategy does not need to be actively monitored or changed. In case of a gold exchange traded fund or ETF, the fund holds the asset and any increase in the value of the asset is a gain for the fund holders. Similarly, in case of Nifty 50 ETF, the investment strategy does not need to change unless Nifty changes the composition of the Nifty 50 index. This is why the expense ratios for ETFs are low. Since they don’t have an active investment strategy, the research expenditure and personnel costs are reduced. This translates into a lower expense ratio and higher gains for the fundholders.

However, investing in ETFs is a longer term investment alternative. This is because the underlying asset may have temporary fluctuations in price which will affect the value of the fund and the investment. However, over a long term, these funds give a return consistent and close to the underlying asset. For example, it is difficult to predict the value of gold. But over a long investment horizon, gold has delivered excellent returns which can translate into growing the investment.

How to invest in exchange traded funds:

Investing in ETF is similar to investing in a stock. You need to buy it directly from the stock market just like you buy shares. You need to select the type of ETF that is available on the market. In India, the best mutual funds to invest now are index ETFs and Gold ETFs. Many different mutual fund houses offer ETFs.

If you want to do a mutual funds investment in India, you can approach a reputed stock broker like IndiaNivesh who can help you with technical knowledge and how to make trades.

Nirav Singhaniya is a Financial Advisor and Share Marketer with 10 years of experience. In his free time, he likes to research on stock trading and share market trends.