Exchange-traded funds (ETFs) are collections of investments that investors can buy and sell on stock exchanges. Hence, ETFs are easily tradable throughout a trading day. ETFs in India offer investors diversified exposure to various assets at a lower fee compared to other types of mutual funds. This article explores the concept of exchange-traded funds in India and analyzes whether they are a viable option for long-term investment.
What are exchange-traded funds?
Exchange-traded funds are designed to track the performance of a specific index, sector, commodity, or basket of assets. ETFs allow investors to buy or sell shares throughout the trading day at market-determined prices. Unlike traditional mutual funds, which are priced only at the end of the trading day, ETFs offer the advantage of intra-day trading and flexibility. In India, the fee structure of ETFs is generally lower because they aim to replicate the performance of a specific index and are not actively managed by fund managers. An example of an ETF tracking a popular index in India is the Nifty 50 ETF. This ETF mirrors the performance of the Nifty 50 index, which comprises the 50 largest and most liquid stocks listed on the National Stock Exchange (NSE).
Choose from any of the following ETF types
- Equity ETFs: Equity ETFs invest primarily in stocks and aim to replicate the performance of a specific equity index. For instance, the Nifty 50 ETF and the Sensex ETF track the Nifty 50 and the BSE Sensex indices, respectively.
- Debt ETFs: Debt ETFs invest in fixed-income securities such as government bonds, corporate bonds, or money market instruments. They provide a relatively stable income stream and are considered lower risk compared to equity ETFs.
- Gold ETFs: Gold ETFs invest in physical gold and provide investors with an easy way to gain exposure to the price of gold without having to hold the physical metal.
- Sectoral ETFs: Sectoral ETFs focus on specific industries or sectors. For example, different ETFs track the banking sector, IT sector, or the energy sector. These are a subtype of Equity ETFs.
- International ETFs: These ETFs invest in foreign markets, allowing Indian investors to diversify their portfolios globally.
How to invest in ETFs in India?
Follow these steps to invest in an exchange-traded fund in India:
- Research and select the ETF that aligns with your investment goals and risk tolerance.
- Place an order through your stockbroker, specifying the quantity of ETF units you want to buy.
- Monitor your investments regularly and adjust your portfolio as needed.
Should you invest in an ETF for the long term?
ETFs are suitable for long-term investing for several reasons:
- Investors can diversify their portfolios by investing in ETFs
- ETFs are cost-effective since they usually have a lower expense ratio than active mutual funds
- Investors can benefit from the liquidity offered by ETFs
- Since ETFs aim to replicate the performance of a specific index, their holdings are generally transparent, allowing investors to know exactly what assets they own
Before investing in an ETF, carry out a risk assessment of your investment profile and check the ETF’s performance in the past.