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Exchange-Traded Fund (ETF): The Definitive Guide [2021]

In recent times, mainly after the market crash, ETFs (Exchange-Traded Funds) became quite famous. There are many reasons for it. ETF inflows have grown tremendously. Currently, there are ETFs for almost all types of asset classes. In this article, we will talk about everything you need to know about ETFs (Exchange-Traded Funds).

What is an ETF?

The full form of the ETF is Exchange-Traded Fund. These are traded on the stock exchanges like any other stock. ETFs track the benchmark indices like Nifty, Bank Nifty, Sensex, Nasdaq etc. The securities in the exchange-traded fund replicate the benchmark index. The return of an ETF depends on the index which it is replicating. Currently, some ETFs can track real estate, gold, stocks, bonds etc. In Fact, it can be built to track any particular investment strategy.

Nifty bees and Bank bees are some of the examples of ETFs that track Nifty and Bank Nifty respectively. All over the world, millions of dollars are flowing into markets through exchange-traded funds. These are the best investment instruments for passive investors.

Pros

  1. Exchange-traded funds are actively traded on the exchanges that’s why they are easy to buy and sell.
  2. The cost involved in buying and selling ETFs is very less when compared with mutual funds.
  3. Unlike mutual funds, NAVs of the ETFs update instantly.
  4. ETFs can be used for portfolio diversification.
  5. ETFs are tax-efficient.

Cons

  1. ETFs cannot track underlying assets accurately because of tracking errors.
  2. During the market crash, due to less liquidity buying and selling ETFs would become hard.
  3. Actively managed ETFs charge more than mutual funds.
  4. Small ETFs can cause liquidity issues because of the high bid to ask spreads.

Different types of ETFs

There are different types of ETFs. Investors hold various types of ETFs to hedge their portfolios and for diversification. Below we provided ETFs with that track different asset classes.

  1. Equity ETFs

Equity ETF is the one that usually replicates and tracks indices or any particular sector/industry. For example, if you want to invest in any index like Nifty or Nasdaq, you can do that by investing in an ETF that tracks those particular indices. Similarly, if you want to invest in any particular industry like banking or consumer goods, ETF can help you with that.

  1. Commodity ETFs

Commodities are good for hedging and diversification. Purchasing gold in physical form is not always a good idea. Physical gold comes with issues like purity, security, taxation etc. But that is not the case with ETFs. Gold ETFs are easy to buy and store. Buying gold in digital form has many advantages when compared with physical gold. Using commodity ETFs, investors can invest in gold or oil. Read more about gold ETFs here

  1. Currency ETFs

Using currency ETFs, investors can buy a single currency like the U.S dollar or euro or a group of currencies. Currency ETFs may track direct currencies or their derivatives. If a currency ETF tracks derivatives, then the risk associated with it is much higher than the one which directly tracks currency. Do some research and know in which kind of exchange-traded fund you are investing.

  1. Bond ETFs

Like commodities, bonds are good for diversification. Instead of directly investing in bonds, investors can use bond ETFs. Using bonds ETFs they can invest their money in various types of bonds to achieve higher returns.

  1. Debt ETFs

Debt ETFs come under the fixed income category. Using debt ETFs, investors can invest in fixed income securities. These are actively traded on NSE. Debt ETFs cost less than debt mutual funds.

How to Buy ETFs in India?

In India, you can buy ETFs on stock exchanges using stockbrokers like upstox or directly through AMC (Asset Management Company) of that ETF. But before that, a few things need to be considered. They are

  1. ETF Type

Above we mentioned various types of exchange-traded funds, investors should know in which type of fund he/she is going to invest. They need to dig a bit deeper about the fund type. They should know about what stock the fund is tracking. In the equity segment itself, there are many sub-categories based on the industry/sectors. Some ETFs track industries and few indices. So, do not forget to research. It helps.

  1. ETF Volume

Always choose an ETF with high volume. Liquidity can be a major issue during market crashes. If an investor selects a low liquid fund, there will be a huge gap between bid and ask prices. With low volume funds, investors end up buying at a higher price.

  1. Tracking Error

Choose an ETF with less tracking errors. This is one of the major drawbacks of exchange-traded funds. High tracking errors eat away the returns. But what is this tracking error? Basically, ETFs track their underlying assets. They also try to mirror their securities. During the process, small differences will occur between the ETF and the underlying assets. This difference is called a tracking error.

  1. Expense Ratio

An ETF with a low expense ratio offers good returns. Always choose the one with a low expense ratio. Actively managed funds attract a higher expense ratio than passive ones. Always compare all the funds before arriving at the final decision.

Difference between ETF and Mutual Fund

Exchange-Traded FundMutual Fund
Most ETFs are passive investing instruments. That’s why they cost less.Mutual funds are active investment vehicles. Costs associated with mutual funds are more than ETFs
NAV updates instantly.NAV will be updated after market hours, almost by the end of the day.
ETFs can be traded on stock exchanges.It is not possible to trade mutual funds.
Funds required to buy one unit of the exchange-traded funds are less.The minimum amount required to buy one unit of a mutual fund unit is higher than ETFs.
ETFs track their underlying assets.Mutual Funds are a group of stocks maintained by a fund manager. He adjusts the fund according to the market.
Difference between ETF and Mutual Fund

How to Buy ETF in Upstox?

Upstox is a discount broker with more than 40 lakh+ customers. If you do not have a demat account in upstox, click here to open it. If you already have an account in upstox, follow the below instructions to buy an ETF. (You can place orders in upstox using app or web etc.,)

  1. Open the Upstox app on your smartphone (or) go to https://pro.upstox.com/  using the browser.
  2. Login using account id and password.
  3. Now, click on the + sign to open the search box.
  4. In the search box, enter the ETF name and add it to the watchlist
  5. Click on the ETF present in the watch list and press “B” and enter the order details.
  6. After entering order details, review and confirm it to execute the order.

To invest in mutual funds, contact – Armoor Sravan (Mutual Fund Distributor);
Ph – +91 96762 73781;
ARN Number :- 180584;
LIC Agency code: 05835643

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