Why should one go for ETFs?
Everyone has become aware they need multiple income sources to become financially independent. You must start saving money and using it to make more money.
If you are making long-term financial plans, the two most crucial elements to consider are saving and investing. You should save your money so you can access it whenever needed. If you start investing early and stay consistent, your money can grow considerably with the power of compounding.
But where should you invest your money?
Smart investing may allow your money to overtake inflation and grow in value. Investing in some of the best ETF funds has good potential because of the power of compounding and the lower risk involved.
Everyone has basic knowledge of ELSS funds. It is a trust that collects funds from a large number of investors and invests all of them in equities, bonds, etc.
ETFs are similar to mutual funds in many ways, but unlike mutual funds, the pool of money is not managed by a professional fund manager, and the money is invested directly into a specific index fund by the company.
In this article, we will discuss what ETFs are, what some of the best ETF funds are, how they differ from mutual funds, and why you should invest in them.
What are ETFs?
ETFs are groups of securities that invest in certain index funds. ETFs can only be traded like stocks on an exchange, such as the NSE and BSE in India.
Unlike traditional open-end mutual funds, which invest a total pool of money at the end of the day at a fixed NAV, ETFs can be bought and sold at any time during the trading day.
ETFs can be active funds that try to outperform the market, but usually they are index funds, and their performance is predictable over time. The best ETF fund would give you returns that are at least equal to those of an index like the Nifty or the Sensex, if not more.
An important characteristic is that if a company has just launched an ETF and you subscribe to that ETF fund, you are buying directly from the company. You can sell fund units after they get listed on the stock exchange.
Differences between ETFs and Index Funds
Before you choose the best ETF fund that suits your needs, you should have an understanding of ETFs with the help of the following differences between ETF and index funds:
Traded on stock exchanges (NSE and BSE)
These funds of securities get traded on the leading stock exchange like shares. In India, they are traded on the BSE and the NSE.
ETFs are like stocks in that they are listed on the exchanges and actively traded, unlike index funds.
Buying and Selling
In the case of ELSS funds, you can instantly buy them to get fund units; however, in the case of ETFs, you can only buy a share if someone else is selling it. Usually, the best ETF fund has a large trading volume, so you will not face many problems finding buyers or sellers for the ETF.
ETF Taxation
We are buying exchange-traded funds from exchanges. They are known as NSE and BSE in India.
So the Securities Transaction Tax (STT) is applied.
For example, when you buy an equity share in a company and the contract is settled by the actual delivery or transfer of the shares or units, you have to pay a 1% tax.
If you are using a DEMAT account, then debit charges are applied as well.
Fixed Fund Size
For ELSS mutual funds, the fund size may vary with the amount of investment, but that is not the case with ETFs.
The fund size of ETFs is fixed from the start and does not expand with increasing investment amounts.
Expenses
The majority of ETFs have lower annual expenses than index mutual funds. However, some of the best ETF funds charge more if they are actively managed.
To buy and sell ETF units, you have to pay a brokerage fee, just like with stocks. This can be a big problem for people who trade a lot or invest large amounts of money often.
ETFs Vs. Open-Ended Funds Vs. Close-ended Funds
| Parameter | Closed-Ended Fund | Exchange Traded Fund | Open Ended Fund |
|---|---|---|---|
| Liquidity Provider | Stock Market | Stock Market / Fund itself | Fund itself |
| NAV | Daily | Real-Time | Daily |
| Sale Price | Significant Premium / Discount to NAV | Very close to the actual NAV of the Scheme | At NAV plus load, if any |
| Fund Size | Fixed | Flexible | Flexible |
| Portfolio Disclosure | Monthly | Daily/Real-time | Monthly |
| Availability | Through Exchange where listed | Through Exchange where listed / Fund itself. | Fund itself |
| Intra-Day Trading | Expensive | Possible at a low cost | Not possible |
| Uses | – | Equitising Cash, Hedging, Arbitrage | Equitising cash |
Advantages of EFTs
They have the following advantages over traditional open-ended index funds:
- Some of the top ETF funds provide intra-day purchases and sell on the exchange, allowing you to capitalise on the current price.
- Most ETFs have lower annual expenses than index mutual funds.
- The costs of distribution are much lower, which are passed on to the investor. And the reach is greater as well because ETFs are listed on an exchange.
- ETFs shield long-term investors from short-term traders. This is because the fund incurs no additional transaction fees when purchasing and selling index shares as a result of frequent subscriptions and redemptions.
- The best ETF fund will provide investors with a fund that closely monitors the performance of an index throughout the day and allows them to purchase and sell at any time.
The bottom line
We hope now you have a good understanding of Exchange Traded Funds and how to choose the best ETF fund for yourself.
ETFs are gaining popularity among passive investors, short-term traders, and investors seeking active investing options.
India’s ETF market appears to be in its early stages compared to other countries.
The growing number of Demat accounts could bolster the positive trend in ETF investments. It would be wise to invest only in the best ETF funds that are established and have a good track record.
Because ETFs offer intraday trading, which traditional funds do not, and do not impose heavy taxation on purchases, they should be considered long-term investing resources. You can easily start investing in them.
If you need help with finances and choosing the best ETF funds to invest in, you can always take the help of experts such as Piramal Finance.