Exchange traded funds are financial instruments which are traded on stock exchange by tracking an index, a commodity or a basket of assets. ETFs can be bought and sold at any time during the day as their price fluctuates throughout the day. With exchange traded fund, shares are not sold as individual units rather they are issued in large blocks. After purchasing a block, investor can split it up and sell individual shares in a secondary market. Thus, an ETF depends on a basket of securities listed on various stock exchanges in a country. The goal of Indian ETF is to capture all major Indian economic sectors by owning a diversified mix of major companies that represent the majority of the total market capitalization of the economy.
Benefits of Exchange Traded Funds
�Unlike mutual funds, ETFs are traded throughout the day. Other funds such as mutual funds are priced once per day, while price movements are continuous in ETFs. Such feature provides great earning potential to speculative investors to benefit from shorter-term market movements.
�Exchange traded funds provide better means of diversification through globalization. There are many foreign ETFs which focus on Indian market, thus you can also invest in international markets.
�With ETFs, you don’t have to put additional burden on your pocket for fund management charges. As ETFs are passive funds, they cost a lot less than mutual funds.
�ETFs ensure easy and simple transferability. You do not have to face complications as involved in case of mutual funds as ETFs are better portable investment instruments.
�ETFs are much tax efficient than mutual funds because of their unique structure. Most of the tax on capital gain is paid on sale and such gains are not realized until the assets are sold with the entire fund.
�You can buy an exchange traded fund in a single transaction, unlike mutual funds. Such convenience is one of the reasons behind its growing popularity.
�In case of most of ETFs, dividends are immediately reinvested back into the fund.
Thus, ETF offers great benefits in terms of stability, flexibility and diversification to yield best return out of your investments.
Most of us want to invest in top performing mutual funds to get best return out of our investment. In order to invest in right investment scheme, it is essential to understand different risks and rewards associated with each mutual fund. Generally, higher the risk, higher is the return associated with a mutual fund. Basically, there are three types of mutual funds:
1) Equity funds: Such funds principally invest in stocks. Such funds basically aims to maximize long-term returns from an optimally diversified portfolio invested in equity funds and related securities.
2) Fixed-income funds: A fixed income mutual fund promises a fixed rate of return and less of a risk than other mutual fund investments. In such funds, money is primarily invested in government and corporate debt. While fund holding may increase in value but the basic purpose of such scheme is to provide current income on a steady basis to investors.
3) Money market funds: It is an open fund in which money is invested in different equity and debt securities in money market such as Treasury bills, certificates of deposit, and commercial paper. The core goal of such investment is to preserve capital along with modest capital gains.