A complete guide to understand ETFs

As an investor, you might always be on a lookout for ways to maximise your investment returns. One way to do that is by investing in ETFs or Exchange Traded Funds. ETFs aim to track the performance of an index like Nifty-50 or a group of underlying assets like a basket of stocks or bonds. ETFs are listed and traded on the exchange just like ordinary stocks, and they allow investors to achieve instant diversification. For example, by simply purchasing one unit of the Nifty-50 ETF, you instantly own a part in the shares of the 50 largest companies in India.

Beyond diversification, there are several reasons why ETFs can be a valuable tool for investors.

  1. Accessibility: ETFs offer diverse exposure to foreign markets like the US or India without requiring you to select individual stocks. ETFs also offer access to the different asset classes like equities, bonds and commodities like gold that may be inaccessible to individual investors.
  2. Cost-effectiveness: All this diversification and exposure usually comes at a low investment cost. For instance, the minimum investment sum is a lot lower for a Nifty-50 ETF than buying all 50 Nifty stocks individually. You also pay fewer transaction fees as it’s a single purchase or sale.
  3. Flexibility and transparency: ETFs are listed on the exchange, and you can buy and sell them any time, just like stocks. They are generally more liquid than non-listed funds like mutual funds. The prices are readily available in real-time throughout the day.

What are the benefits of investing in ETFs?

Similar to stocks, you can buy and sell an ETF. When the stock exchanges are open, you can base your investment decisions on the ticker symbol and the price data throughout the trading day. Keep in mind that ETFs by nature are straightforward to trade, mainly because you can buy and sell pretty much whenever you want, any time of the trading day because these are index-based. In addition, you can also get a whole lot of transparency since their holdings are published every day. They’re also considered to be tax-efficient because they generate a lower level of capital gain distributions.

Are ETFs for you?

Several Exchange Trade Funds are now available in India, covering a wide range of asset classes like equity, fixed income, and commodities from different countries worldwide, including China, India, the US and even regions like ASEAN or Asia-pacific. So, if you want to gain diversification to a broad market in a cost-effective manner but don’t know which stocks to pick, ETFs could be your answer.

If you find it difficult to shortlist and choose the right investment avenues to park your savings, or to earn good returns, it is prudent to reach out to a financial advisor or a financial advisory service provider. These services can help you to create an effective financial plan, including choosing the appropriate investment routes for you to reach your financial goals.