Introduction to ETF
ETF (Exchange-Traded Funds) were first launched in the USA in 1993. Since then, they have gained popularity not just in America but also worldwide. In India, the first such fund, Nifty Bees, was launched in 2002 and has since delivered an impressive 1914.15% growth (absolute returns). Despite the growing popularity, many investors remain more familiar with stocks and mutual funds, with less awareness of this investment vehicle.
This article provides a beginner’s guide to understanding these funds.
What is an Exchange-Traded Fund (ETF)?
An Exchange-Traded Fund is similar to a mutual fund but with some unique features. Like mutual funds, these funds collect money from investors, are managed by a fund manager, and have a Net Asset Value (NAV). However, there are two main differences:
Just like stocks, they are listed on stock exchanges, allowing investors to trade them through their brokers.
Categories of Exchange-Traded Funds(ETF)
These funds can be divided into four main categories:
Advantages of ETF
Investing in these funds offers several benefits:
How to Select an ETF
When choosing a fund, consider the following aspects:
Comparing ETFs, Stocks, and Mutual Funds
Particulars | Exchange-Traded Funds | Stocks | Mutual Funds |
---|---|---|---|
What is it? | A basket of securities | Single security | Investment pooling in assets |
Risks | Diversified, market-related | Higher, based on company | Diversified, market-related |
Trading | Throughout the day | Throughout the day | Once a day after market closes |
Control | Less than stocks, more than mutual funds | Most control | Least control |
Key Takeaways
Conclusion
Exchange-Traded Funds (ETFs) offer a versatile investment option for both novice and experienced investors. They combine the best features of stocks and mutual funds, providing the diversification of a mutual fund with the flexibility of stock trading. With lower expense ratios and the ability to be traded throughout the day, ETFs are cost-effective and accessible. Their passive management style, often linked to benchmark indices, makes them a straightforward choice for those looking to invest in broader market segments or specific sectors. However, it’s essential to consider factors like liquidity, expense ratios, and tracking errors when selecting an ETF. As awareness grows, these funds are becoming an increasingly popular tool for portfolio diversification, offering a balanced approach to achieving long-term financial goals. Overall, ETFs are a valuable addition to an investor's toolkit, providing an efficient way to gain exposure to a wide range of assets.
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