Exchange-traded funds: all you need to know!

A mutual fund is an investment tool where you invest your money in a professionally managed fund to get good returns. These funds are either actively managed or passively managed. Passive management of investments include funds that mimic a market index. Exchange traded funds are among the best forms of passively managed funds. They offer you access to the market at low costs and help you build your investment portfolio.

What is ETF?

• ETF or exchange-traded funds pool money of several investors to buy securities.
• An investment manager keeps track of who owns what and everyone’s stake in the investment.
• You can buy securities like stocks, bonds, currencies, commodities, and other assets.
• Your profits and returns are in proportion to your investment.
• Unlike mutual funds, exchange traded funds are on sale throughout the day. You can buy or sell ETFs from a brokerage account as many times as you want in a day.
• Large ETFs have lower fees and a higher average rating volume. This makes them a more sought after option.

Buying an ETF

• For buying or selling exchange-traded funds, you need a trading account with a broker and a demat account to hold the units. Your account should be KYC-compliant.
• Before buying exchange-traded funds, you must evaluate your options.
• Consider the investment objectives, risks, and charges. The fund’s performance history, expense ratio, and duration of existence must also be considered.
• Another critical consideration is taxes. Depending on the structure of the ETF and the investment, the tax will vary.

Advantages of ETF

• Exchange traded funds allow you to sell short, place stop-loss or limit orders, and even buy on margin.
• Most ETFs track an index, which makes it easier for the investor to understand his funds. Also, it makes the investment more transparent.
• ETFs cost less than actively managed mutual funds.
• There is no minimum investment for ETFs. For short-term investments, there are no redemption fees either.
• Investing in ETFs is a great way to diversify your portfolio.

Disadvantages of ETF

• It must be purchased through a broker, which means you have to pay a brokerage fee.
• The commission paid to the broker may significantly reduce your net return.
• Intraday change in pricing can distort the objectives and long-term goals of the investment.
• You have to consider your taxes, which may be significantly affected by investing in ETFs.

Exchange traded funds are still a new concept in India. Most people are yet to know what is ETF. However, they are expected to grow and offer attractive choices regarding diverse assets and for different styles of investments. Therefore, investing in ETFs can help you realise your financial goals more quickly and safe mannerly.