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An Exchange Traded Fund (ETF) is a cost effective and convenient way to invest in a variety of asset classes like equity, debt and commodities.
Investors may create their investment portfolio with ETFs depending on their risk appetite and needs.
In this article of Passively Active, an investor awareness initiative of Mirae Asset Mutual Fund, the fund house sheds light on how ETFs can be used as investment options.
- ETFs are a basket of assets that tracks an index, a commodity or bonds. However, ETFs are more like common stocks that are traded on a stock exchange unlike a regular mutual fund.
- ETFs simply replicate the performance of the underlying index
- You need a demat account to buy and sell ETFs
- ETFs may be bought and sold in real time throughout the trading day
How can ETFs be used for all investment needs?
- Investors may invest in equity ETFs including smart beta funds if they have high risk appetite and a long-term investment horizon
- You may invest in debt ETFs if your risk appetite is low and short-term time horizon
- Commodities ETFs allow investors to get exposure to precious metals like gold and silver
- You may invest in international ETFs to diversify your investment portfolio across geographies
- You may take a tactical call through ETFs as they allow real time buying and selling opportunities
What factors should be considered before choosing an ETF?
- Investment objective: ETFs should be chosen based on the investment goal and risk appetite
- Impact cost: Currently, ETFs are less liquid. Hence, investors should look at impact cost i.e. difference between the current market price and traded price to shortlist ETFs. Lower the impact cost better is the liquidity
- One-year average trading volume: One-year average trading volume is calculated by the average value of trades in a year divided by the number of days in the trading cycle. Trading volume indicates the liquidity and number of investors. The higher the trading volume, the better the liquidity of the fund.
- TER: The total expense ratio of ETFs should be relatively lower as higher TER may lead to higher tracking error
- Tracking error: Tracking error is the standard deviation of the difference of daily scheme return and daily benchmark return over a period of time . Low tracking error means the ETF successfully replicates a benchmark, thus mirroring its returns more precisely and accurately.
- Tracking difference: Tracking difference is simply the annualized difference of daily returns between index or goods and the NAV of the ETF. Lower the tracking difference, better the fund..
Conclusion
ETFs offer a variety of options to investors to cater to their investor needs.
The information contained herein is compiled from third party and publicly available sources and is included for general information purposes only. Views expressed here cannot be construed to be a decision to invest. The statements contained herein are based on current views and involve known and unknown risks and uncertainties. Whilst Mirae Asset Investment Managers (India) Private Limited (the AMC) shall have no responsibility/liability whatso- ever for the accuracy or any use or reliance thereof of such information. The AMC, its associate or sponsors or group companies, its Directors or employees accepts no liability for any loss or damage of any kind resulting out of the use of this content. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein. Any reliance on the accuracy or use of such information shall be done only after consultation to the financial consultant to understand the specific legal, tax or financial implications.
IAP Disclaimers
An Investor Education and Awareness Initiative by Mirae Asset Mutual Fund. All Mutual Fund investors have to go through a one-time KYC (Know Your Customer) process. Investors should deal only with Registered Mutual Funds (RMF). For further information on KYC, RMFs and procedure to lodge a complaint in case of any grievance, you may refer the Knowledge Center section available on the website of Mirae Asset Mutual Fund.
In a newly launched investor education & awareness initiative called ABCDETF Mirae Asset Mutual Fund explains the concept of ETFs.