Do you remember the commercial ad by Shikhar Dhawan- Mutual Fund sahi hai. Here the question is Mutual Fund kyun sahi hai?
So, today we are going to tell you in brief about ETF. So before start about ETF (Exchange Traded Fund), we need to understand about Mutual Funds and Index Funds to make it in the simplest way.
Basically Mutual funds are funds when lots of people give their saving to other companies. Now these companies have team of experts who are masters in investing that money in Stocks and that we get benefit out of the profit.
Now what is Index Funds? Index funds are also as same as Mutual Funds but the only difference is that they don’t have the team of experts, instead they invest our money directly to Index like – Sensex, Nifty.
So now we can understand what are ETF’s? Remember 99% of ETF’s are considered Index Funds only. They are more of like passive funds. Here the question is if ETF’s are like Index Funds then what is the difference between the two? Let us understand the difference-
1) ETF’s are the fund which can purchase only from stock exchange like Sensex or Nifty. And when you purchase mutual funds, you buy them from mutual fund companies.
2) When you invest some amount in buying mutual funds, you get units in exchange from the company you are investing it but in ETF you can only purchase the shares when someone is selling it, that’s the reason the name is Exchange Traded Funds.
Since India is still facing some issues with ETF’s, there are times when you want to sell your shares but not able to find the buyer. So if you are ETF trader, it is very important to understand the strategies of it.
Advantages and Disadvantages of ETF
- Lower cost – ETF’s have comparatively less expense ratio than Mutual Fund.
- Instant Diversification- Today hundreds of ETF options available- large cap, mid cap, lower cap) , international and in specific countries.
- Liquidity- It is not only limited to time specific, we can trade anytime.
- Tax Efficiency- ETF investors have more control over when they incur taxes as compared to mutual Funds.
- Can be purchased in Small Amount
- Over Diversification- Generally ETF’s are not actively managed but they follow specific index.
- Lack of Rebalancing-Due to stock decline in price and smaller percentage of Index, you may own over priced stocks.
- Lower Dividend Yields- The risk with owning ETF may be lower but for investors it can be risk taking.
So the Bottom line is as an investor, you might gain exposure to specific sector. It has its own advantages and disadvantages, you keep an eye open and keep yourself updated with the latest changes in the market happening. I hope you like this article and hope you find it informative. Don’t forget to comment below.