An Exchange Traded Fund (ETF) is a type of security that contains a portfolio of securities(such as stocks or bonds). This collection of securities acts as the underlying asset for the ETF. They are just like Mutual Funds. However, unlike Mutual Funds, ETFs are traded on stock exchange just like any normal stock. ETFs trade close to their NAV value.
ETFs traded on National Stock Exchange are:
1) Equity ETFs: They consist stocks that are from and track a specific industry or index.
2) Gold ETFs: They are made of investment instruments that are based on gold prices and invest in gold bullion.
3) Global Indices ETFs: They are investment products that allow the domestic investors to take an exposure to international indices.
4) Debt ETFs: They allow investors to take an exposure and invest in fixed income securities.
ETFs are traded during the normal market hours unlike Mutual Funds which are traded once a day after the market closes. Investors can buy ETFs directly from the stock exchange through their brokers.
Advantages of ETFs:
1) Allows diversification as ETF are composed of multiple assets.
2) Lower Costs as the investor doesn’t have to pay advisory/management fees to the fund manager.
3) The investor has access to wide range of stocks to invest from domestic and international indices.
4) ETFs can focus and target a specific industry(for e.g. Nifty Bank)
Disadvantages of ETFs:
1) ETFs are not quite popular in India, therefore liquidity is low.
2) There is not a wide variety of options to choose from as compared to the developed markets.
3) Frequent buying and selling increases the transaction cost as it attracts brokerage charges.
Examples of ETFs in India:
|Nifty Next 50
|S&P BSE 500 index
ETFs are growing popularity in India. Investors who opt for passive investment instruments can use ETFs as a good option.
Just for Reference:
IDFC NIFTY ETF
Closing price on 08/05/2020: Rs 98
NAV: Rs 95.85
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Finance graduate with a strong desire to understand the complexities of financial markets. I make financial judgments for my investments based on the information I gained during my academic education. I write articles about financial literacy for finnute.in in order to promote financial literacy among the general public.