Exchange Traded Funds are one of the most innovative and popular investment options in India, after mutual funds. ETFs are pooled investment funds that invest in various asset classes such as Indian and international equities, commodities and bonds. Units of ETFs can be bought and sold just like shares on a stock exchange. They are passive investments that usually track and replicate a market index such as the BSE Sensex and the CNX Nifty.
Industry experts say ETFs are less susceptible to extreme volatility because they are linked to the indices which are quite diversified, due to which they are popular among investors. ETFs also allow investors the opportunity to benefit from intraday movements, as they can be bought or sold anytime during the market hours at a price close to the actual NAV of the scheme.
Even though stock markets are known to generate the highest returns, investing in the stock market can be a formidable task, particularly for people just starting off. Experts suggest passive instruments like ETF’s can also fetch good returns rather than get entangled in the intricacies of the financial markets. ETFs also come with advantages like diversification, professional management, liquidity, at a fraction of a cost as compared to other investment options. Hence, they are one of the best-suggested investment vehicles for young/new age investors.
According to experts ETF market in India is still in its nascent stages. 2020 was a volatile year for most ETFs, however, as compared with equity or currency-based ETFs, Gold ETFs performed better in 2020, based on the YTD figures.
Nonetheless, experts say there are always risk involved with any kind of investment. For instance, if the stock market as a whole takes a turn for the worse, an investor’s index ETFs are likely to be affected as well. However, as compared to holding individual stocks, experts say index ETFs are much less risky, as ETFs provide efficient diversification.
If you are confused about ETFs for long-term buy-and-hold investing, experts say, ETFs are a great investment option for long-term buy and hold investing. It is so because it has a lower expense ratio than actively managed mutual funds that generate higher returns if held for the long run.
ETFs have lower administrative costs, even less than 0.2 per cent per year compared to over 1 per cent for some actively managed funds.
Investors can invest in ETFs if he/she wants a portfolio that matches the performance of a market index. Similar to equity investments, which generally beats inflation over time, experts say ETFs could also offer an inflation-beating return in the long term for buy-and-hold investors.