A Complete Guide to Start Investing in ETFs

There are multiple investment options for investors to choose from depending on their risk appetite, investment horizon, and financial goals. First time investors who want to understand how equity markets function may consider investing in equity mutual funds or exchange traded funds. But what are equity funds and ETFs? What is the difference between these two? Should you be investing in ETFs or equity funds if you are a first time investor? Although equity mutual funds are a favored investment tool, here are a few reasons why one can start one’s investment journey with exchange traded funds.
Here’s a complete guide to investing in ETFs.

What are ETFs?

Exchange Traded Funds, commonly referred to as ETFs, are mutual fund schemes that invest their entire corpus in their underlying benchmark / index to generate capital appreciation. These are open-ended schemes that are publicly listed at the exchange just like company stocks. To put it in market regulator SEBI’s own words, an exchange traded fund “is an open-ended scheme which replicates/tracks the particular index. Of the total assets, this fund must invest a minimum of 95 percent in securities of a particular index (which is being replicated or tracked)”.

What are the different types of ETFs available for investment in India?

First and foremost, investors must get themselves acquainted with the different types of ETFs available for investment so that they can make an informed investment decision.

Equity oriented ETFs: The investment objective of equity oriented ETFs is to track the movement in market indices or to track the performance of listed company stocks belonging to a particular sector or industry. The investment objective of these funds is to mimic the performance of their underlying benchmark with minimal tracking error.

Debt ETFs: Debt oriented exchange traded funds are ETFs that give retail investors exposure to fixed income securities. Debt ETFs trade on the cash market of the National Stock Exchange and investors looking for a scheme with the benefit of debt securities with the flexibility of ETFs may consider investing in these funds.

Gold ETFs: While some exchange traded funds track the performance of a particular index, gold ETFs aim at generating capital appreciation by tracking international gold prices. They are considered by investors who want to invest in gold but want to stay away from the hassles of owning gold in physical form.

International ETFs: As the name suggests, international ETFs are exchange traded funds that invest in securities of companies listed offshore. They track the performance of foreign securities to generate capital appreciation.

How are ETFs different from mutual funds and direct equities?

Benefits of investing in ETFs

ETFs have a low expense ratio which can help investors in the long run. Their passive management nature effectively voids human interference at large. Investors may consider investing in an ETF scheme with a low expense ratio. ETFs offer diversification which can mitigate the investor’s overall investment risk as they have exposure to numerous securities. Investors can easily enter or exit ETFs anytime as they do not have any lock-in period. They can even trade ETFs at the current market price which is not possible with other mutual fund schemes.

Investing in ETFs may seem like a lucrative option, but investors should talk to their fund manager who might help them arrive at an informed investment decision.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.