Know about Exchange Traded Funds (ETFs)

ETFs are a collection of assets (like stocks) that are bought and sold as a whole on the exchange - similar to how stocks are bought and sold.

 Among different assets of investment available to investors, this is just another product.

When compared to mutual funds, it has its advantages and disadvantages.

 As this course progresses, you will learn more about the advantages and disadvantages of ETFs.

 One trait that ETFs are famous for is having a very low expense ratio even when compared to index funds, let alone mutual funds.

 When you invest in mutual funds, you can use several options - online, offline, Demat account, etc.

 Most mutual funds let you start investing from a really low amount like Rs 500 or Rs 1,000.

This means it doesn’t matter how much 1 unit of a mutual fund costs (also known as NAV).

You can buy 0.5 units, 0.1 units, or even less.

 ETFs cannot be bought without a Demat account. ETFs are bought on the exchange - like how you buy stocks. So like stocks, you will need to place an order during market hours (or use after-market orders).

 And unlike mutual funds, the minimum amount you can invest depends on the price of 1 unit of the ETF. You cannot buy less than 1 unit of an ETF.

 Liquidity refers to how easily you can convert your assets to money.

 Example: real estate is not very liquid - takes very long to sell whereas shares are very liquid.

 Mutual funds are relatively very liquid.

Fund managers of liquid funds usually keep some cash aside for investor withdrawals.

So when you wish to take out money from a mutual fund, the fund manager simply takes money from this cash kept aside and sends it your way. Later, he/she will sell some assets based on conditions to keep enough cash in reserve.

 This is not the case with ETFs.

 ETFs are traded on the exchange and if there are no buyers, you can have difficulty selling your ETFs instantly. In more mature ETF markets like the USA, there are enough buyers so liquidity is usually not a problem.

However, in India, ETFs aren’t that popular so liquidity can become an issue from time to time.

 What do ETFs invest in?

  The general belief is that ETFs invest in indices like Sensex and Nifty.

It is true that ETFs invest in indices a lot but they also invest in other assets like gold beyond indices.

In case the above line is confusing you, Sensex is a list of the 30 biggest stocks in India and Nifty, the 50 biggest stocks.

 ETFs in India are relatively a new concept but abroad, ETFs are very popular. There are dedicated ETFs for themes like pharma, technology, environmentally friendly, and so on.

 Which to invest in - mutual funds/index funds or ETFs?

   For a trader, it makes no sense to invest in mutual funds/index funds. Only ETFs would work.

But for long term investors, the pros and cons need to be measured.

ETFs in India do have liquidity issues though their expense ratio is usually lower.

 Also, most long term investors usually prefer to start an SIP which is not easily possible with ETFs.

Top 10 most purchased ETFs by Investors: