Exchange Traded Funds (ETFs) are one of the popular investment avenues that investors can opt for to diversify or boost their portfolios. Over the years, ETFs have earned wider investor acceptance and this can be gauged by the performance of this avenue in the overall Indian mutual fund industry.

As per a report by the Association of Mutual Funds in India (AMFI), the Indian mutual fund industry in May 2021 saw a 35.87% increase in assets from May 2020. Providing an insight into the performance of different assets, the ETF market share saw a significant increase of 9.6% in May 2021, compared to 6.9% in May 2020.

What is an Exchange Traded Fund (ETF)?

An ETF is a type of index fund or a mutual fund that trades on an exchange like a stock. It’s like a basket that contains many other securities, like stocks, bonds, or commodities, to name a few.

Let’s look at 3 critical attributes of ETFs:

  1. Exchange Traded: ETFs are listed on a stock exchange just like a share. This means you can trade them as you would with ordinary shares of a company, provided you have a Demat and a Trading Account
  2. Cost: ETFs could be a cost-efficient investment tool for many investors. Most ETFs are index funds, which means they track the returns of a market index and are passively managed. Also, the ETF structure provides cost advantages in record keeping, transfer agents, and other fees
  3. Tax-efficient: ETFs have the potential to be tax-efficient and this is because there are comparatively fewer taxable events. ETFs generate a lower level of capital gain diversion

ETFs also offer several benefits. Some of them are:

  1. Diversification: When you buy shares in a company, you’re investing in the stock price of that one company. This is a great way to make money, but it could also be risky if the stock price goes down.

On the other hand, when you invest in an ETF, you’re buying shares, or a part of shares, in multiple companies, sometimes hundreds of them at a time. So, if shares of one company go down, you might not lose as much because shares of other companies could go up.

  1. Liquidity: Just like stocks, ETFs can be traded throughout the day. By being a liquid investment option, you can book your gain/loss any time during the trading hours.
  2. Lower management fees: The price of an ETF tracks indices like Nifty-50 that would rise and fall along with that index. This is called passive investing. Passive meaning the fund managers don’t have to do much. They just set up the fund and let it be. This lowers the management fees.

Are ETFs a better choice for you? 

Choosing the right investment tool and the right Exchange Trade Funds depends on several factors like your risk appetite and what financial goals you want to fulfill in what amount of time. If narrowing down on these criteria seems difficult, it is prudent to reach out to a financial advisor who can curate bespoke investment plans to help you to reach your goals.

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