What are Exchange Traded Funds? Are they a smart investment?

ETFs or Exchange Traded Funds are similar to mutual funds in their composition, regulation, and management. Similar to mutual funds, ETFs are a basket of securities traded on a stock exchange. ETFs offer diversified exposure for various asset classes, such as stocks, bonds, commodities, currencies, options, or a combination of these. However, unlike mutual funds, ETFs track a specific index, such as BSE Sensex, NSE, Nifty, etc. Recently, ETFs have become popular amongst Indian investors because of their cost-efficiency and liquidity.

Here is a quick guide about exchange-traded funds:

What are exchange-traded funds?

An ETF is a combination of securities, including stocks, bonds, commodities, currencies, or a combination of these securities that are traded on a stock exchange. Like mutual funds, ETFs pool money from investors, allowing them to invest in a diversified basket of assets without being exposed to the risk of investing in an individual market.

Your interest in an ETF is proportional to the securities you buy from the asset pool. Mutual funds and ETFs are both registered and regulated by the SEBI (Securities and Exchange Board of India). In India, there are different types of ETFs, such as equity ETF, bond ETF, commodity ETF, and currency ETF. You can choose an ETF pool that best suits your risk appetite, returns expectations, and investment horizon.

How do ETFs work?

ETFs function like mutual funds apart from the way you buy an ETF. Unlike mutual funds, you can buy ETFs from a brokerage account like you buy shares. Each ETF basket of securities has a unique ticker like BSE Sensex, NSE, etc. This basket has an intraday price and is available for trading on the stock exchange for investors. You can buy and sell the ETF any time of the trading day. However, unlike a mutual fund, you do not have ownership of the underlying assets of the ETF basket.

Are ETFs a smart investment?

ETFs are a smart investment because of the following reasons:

  1. ETFs are vertically and horizontally diversified. You can invest in ETFs focused on stocks, commodities, currencies, or a combination of them all. You can also invest in sector-specific funds like technology, healthcare, etc.
  2. You can trade in ETFs from your brokerage account like you trade shares. You can buy or sell ETFs any time of the day, unlike mutual funds that you can trade only once a day.
  3. Equity ETFs with a lock-in period of three years are eligible for tax deductions under Section 80C.
  4. ETFs can be more tax-efficient than mutual funds because ETFs distribute smaller and fewer capital gains. The capital gains tax rate is the same for mutual funds and ETFs.

Overall, ETF is a smart investment for investors who are looking to create a low-risk, moderate-return portfolio. Alternatively, you can also invest in mutual funds that help you create a portfolio aligned with your risk tolerance and return expectations.

Use the Tata Capital Moneyfy App to find a mutual fund scheme that best aligns with your financial interests.

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