There are active investors as well as passive investors where active investor directly purchases stock from the stock markets whereas passive investor indirectly buys stock through Mutual Funds or Exchange Traded Funds. When an investor resorts to passive investing he/she need not decide which stocks to buy; when to buy; or when to exit, as these decisions are taken by the Fund Manager managing MF scheme. In the case of Mutual Fund (MF) Scheme, units could be bought only at the end of the day Net Asset Value (NAV) whereas it is real time buying while dealing in Exchange Traded Funds. In other words, market price of MF Unit changes at the end of the day, but Stocks and ETFs have the flexibility of buying the real time pricing.
What are Exchange Traded Funds?
Exchange Traded Funds are basically Index Funds those are listed and traded on the Secondary Markets like Stocks. Let us understand the definition of Index Fund before going to ETFs. SENSEX is an Index consisting of 30 stocks, carrying different weight for each of the stock and a fund mimicking the stock composition of SENSEX is called as Index Fund. NIFTY Index, IT Index, Pharma Index, Banking Index etc when mimicked by a Fund, comprising pool of same stocks as that of benchmark index, is called as Index Fund. Like Index Funds, ETFs also simply mimic underlying index.
Advantages of Exchange Traded Fund
There is no active management of stocks by any Fund Manager as that task is performed by the Market itself. Since ETFs are a well diversified lot, these are less risky than Stocks. If one intends to buy best of the Banking Stocks at low cost, buy a Bank ETF. Since best of the stocks form Index, the fundamentals of these stocks are likely to remain intact. These type of holding is generally long term in nature. Absence of active Fund Manager for ETF makes it cost effective for the investors.
Selection of Good ETF
The ETFs being available are of 4 types namely Equity based, Debt based, Gold based and linked to World indices. Equity Based index track SENSEX, NIFTY, Banks, Midcap Stocks, Infrastructure stocks etc, therefore, it is essential for an investor to select a theme before investing. Investors must ensure to buy an ETF that has high trading volume and enough liquidity. ETF has a low tracking error, which means difference between returns generated by underlying index and the ETF. It would be advisable to buy an ETF that has low Expense Ratio. Indian Markets have Equity ETFs, Bond ETFs and Gold ETFs, which constitute total of 71 ETF schemes. The Assets under Management (AUM) stand at 6% of the MF Industry AUM, which works out to 150k crore approximately. The latest Bharat Bond ETF launched by GOI through Edelweiss AMC is a good investment vehicle that would comprise of well rated PSU Bonds, which is likely to generate good returns than Bank FDs.
Keep watching this space for more updates on investment options!
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