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what is etf in stock market & how to invest in etf

April 20, 2022

Want to what is etf in stock market? Well you have landed on the right article, make sure to read the article carefully to know how to invest in etf

We have all heard about mutual funds, but what exactly are they? A mutual fund, as the name suggests, is a pool of money collected by a group of investors.

This money is then managed by professional fund managers on their behalf. We are all familiar with the concept of the stock exchange.

Now, what if you could trade the pooled fund or mutual fund that we described earlier, in the same way, as any other stock on the stock exchange?

So, you can now see that exchange-traded funds (ETFs) are investment funds that trade on an exchange, just like stock exchanges. There is a lot to know about ETFs. The different sections below will give you a working idea of what are ETFs, how to buy etf and how to do etf investment. 

What Is ETF In Stock Market & How To Invest In ETF (2022 Updated)

What are ETFs?

The easiest way of describing ETFs or exchange-traded funds is by saying that they are a basketful of securities. The ETFs hold assets like bonds, stocks, equities, and entities such as gold.

Unlike other funds that do not fluctuate through the day, ETFs are more like stocks.

There are changes in price according to supply, demand, and holdings. Hence, this type of investment fund does not need to be handled by professional fund managers. It is also more economical than mutual funds.

How do ETFs work?

ETFs are an amalgamation of both mutual funds and stock exchange: 

The fund is similar to mutual funds in the way that it invests the investors’ money in a basket of securities. In exchange, they get units of the funds.

  • One of the most significant differences between mutual funds and ETFs is the way they are priced. Mutual funds do not change rates based on the market hour. A price is announced every day, and you can sell on the net asset value. But ETFs change price throughout the day and are more like stocks in regards to pricing.
  • As mentioned earlier, ETFs are a basket filled with securities. When the rate of these securities changes, the price of the ETFs changes accordingly.
  • Since ETFs are more like shares, you can buy or sell them on the stock exchange as you like.

ETF schemes

There are many exchange-traded fund plans. Here are some of the better-known schemes:

Index ETF

  • Index ETFs are the most common type of ETFs. They aim at tracking the performance of market indexes like S&P 500, Sensex, and Nifty. When you invest in an index ETF, you get the benefits of several securities under one fund. As returns, you get the returns of the index your ETF is keeping track of.

Gold ETF

  • Gold ETF tracks the physical price of gold. It is a popular option among investors who do not want to face risks like inflation and fluctuations or disturbance in the market.

    They hold the same value as 24-carat gold and are a better option for some investors because they are more cost-effective. The only problem is that because gold prices fluctuate significantly, this kind of ETF is also liable to changes.

Bank ETF

  • Bank exchange-traded funds benefit investors by bringing them banking services. These services include loans, deposits, insurance, and other services. Banks get profits by charging these services and the appealing interest rates on the loans.

    Thus, bank ETFs facilitate investors to take advantage of these profits if they invest in banks.

International ETFs

  • International ETFs are funds that aim at tracking foreign securities. Such funds can track indexes that are global or specific to a limited region like a country. These are effective options when investors want to diversify their geographical risks by etf investing in several companies across the globe. 

Liquid ETF

  • Liquid ETFs are the go-to for investors when they want to reduce the risk in pricing and have potentially higher returns. They invest in government securities and offer appealing liquidity so that investors can gain returns from opportunities to invest.

What is the difference between an ETF and a mutual fund?

Although mutual funds and ETFs are similar in many ways, there are many differences between them as well. Here are a few:

Mutual Funds

Exchange-Traded Funds

These funds have operating expenses.

An ETF has lower operating expenses compared to mutual funds.

Mutual funds have low liquidity. 

These funds have higher liquidity because their liquidity is linked to that of stocks.

Tax liabilities are higher for this type of fund.

Investors get tax benefits because of their creation and redemption. 

Investors do not have to pay extra costs when buying or selling mutual fund shares.

Investors have to pay transaction costs called the “bid-ask spread.”

Mutual funds carry minimal expenses.

There are no minimum expenses for ETFs.

Certain cases can carry a penalty for selling shares earlier. 

In ETFs, no such penalties are attached to the early selling of shares. Investors can buy or sell throughout the trading day.

Investors can only trade their shares at the net closing value.  

The value of ETFs varies throughout the day, and investors can trade at any cost during the trading day.

One can only purchase these shares at the net asset value during the trading day. 

One can purchase at any time during the trading day at the current price during that time. 

How to select an ETF for yourself?

You need to bear several things in mind when investing in ETFs. Here are a few considerations:

Error-tracking

  • ETFs aim at tracking indexes. They invest in securities that make up the indexes and replicate them as closely as they can. But some do not do that and have a higher tracking error. Hence, while investing, it is best to buy ETFs with a significantly small tracking error. 

Expenses

  • If you do not want your expenses to lower your returns significantly, it is a good idea to be cautious and invest in ETFs with a lower expense ratio so that you can get better returns. 

Trading volume

  • As discussed earlier, buying and selling ETFs is much easier compared to mutual funds. Investors can buy and sell them as convenient throughout the trading day. This fund did not offer this much liquidity a while ago, but now only a few carry this issue.

Category

  • The world of ETFs is a big one with several categories and subcategories. For instance, there are gold, equity, and Index ETFs. Before buying any type, it is essential to understand it suits your needs the best.

    Among subcategories, foreign ETFs have multiple varieties. There are those with a global focus and others with a more specific approach. Similarly, equity ETFs have subcategories based on capitalisation and sectors. 

Underlying asset

  • Examining the underlying assets is quite significant when you are investing in an ETF. It is advisable to look into widely spread indexes as compared to ones that focus on specific geographical locations or industries. 

Advantages of ETFs

  • Tax benefits

    Even though both ETFs and mutual funds are subjected to taxes and other charges, the one extracted from ETFs is pretty low. This makes ETFs an affordable option for people who cannot invest a lot of money at one go. 
  • Trade security

    When you invest in ETFs, you can trade, sell or buy at any point during the day. There are significant fluctuations in the price, and you do not have to wait for the closing net asset value to sell your shares.

    This increases the fund’s liquidity and makes it appealing to people who want flexibility in their investments. 
  • Management benefits

    ETFs are passively managed, which means that they go for the best companies in a specific stock exchange. It reduces the risks of loss because small-scale companies have a higher chance of being subject to losses. 
  • Benefits over mutual funds

    Mutual funds have a high etf expense ratio. You need to meet a minimum investment limit and also spend money on the management of these funds. But, for ETFs, you do not have to worry about these expenditures, making them an affordable option. 
  • Benefits over-investment in companies

    Buying the shares of a company exposes you to higher risks because you are solely dependent on the performance of that particular company. ETFs do not pose this issue.

    Your equities depend on the shares of several companies, and that lowers risks because you do not depend on a single company.

Disadvantages of ETFs

  • Volatility

    Unlike government bonds, ETFs are subject to market fluctuations. Any returns depend on the current market situation, making it a riskier option for some. 
  • Lack of diversity

    ETFs focuses on the best-working companies on the list, which means they do not look at smaller ones that may have a promising future. 

Brokerage and Demat account requirement

ETFs may be free from management fees, but you do have to look into stockbrokers and pay them for their services. If you opt for looking into the shares yourself, you will need a Demat account. Handling a Demat account can be tricky and will not be easy for a newbie.

Final words

There is a lot one can know about exchange-traded funds, and hopefully, the sections covered in this article helped you gain some perspective. But, before investing in an ETF, it is essential to read the prospectus, which explains everything in detail.

You get to know the risks associated with the ETF, costs, disadvantages and advantages, and other crucial issues. 

You also need to make sure that you know what you are going in for. If you do not understand something, it is always good to refrain from investing in the scheme. You can also consider talking to an investment professional before looking into ETFs.

Be sure that you go to a professional who can explain things to you in a satisfactory and simplified manner. Clarity on everything is essential when it comes to ETFs.

I hope you liked our article on what is etf in stock market, and it must have solved your queries such as what are the leveraged etf, what is expense ratio in etf, difference between mutual funds and etfs(etf vs mutual funds) or difference between etf and mutual funds 

if you have any comments or suggestions do share them in the comments below. 

frequently asked question

Q1. Where can I buy an ETF in India?

Buying an ETF in India is very easy. You can buy, invest or sell ETFs sitting at your home through your online trading portal itself or with your stockbroker’s help as well. They are listed similarly to stocks on the stock exchange. You can buy ETFs anytime during the trading day.


Q2. Can we buy an ETF through Zerodha?

Yes, you can buy an ETF through Zerodha. All you need to do is open a Demat and trading account on the website. The website aims at making the process easy and quick for every customer, so there is no room for confusion.

The most significant advantage is that all the ETF transfers are transferred to your Demat account.


Q3. Is SIP possible in an ETF?

Yes, you can easily invest in an ETF through your SIP. Choosing the SIP way is convenient and has many benefits. SIP is a wonderful way to ensure security and is a top-notch option if you cannot invest a bulk of the money at once.

ETFs put the power of compounding to use when you start investing long-term. 


Q4. Is ETF good for long-term investment in India?

Yes, ETFs are excellent long-term investment options. A few reasons for this are that this kind of fund has a lower expense ratio. When investing, you do not need an investment professional.

This type of investment can also be sold and bought at any time during the trading day. It thus offers flexibility and can be appealing as a long-term investment.


Q5. Which Nifty ETF is best?

There are many types of Nifty ETFs in the market. When delving into the Nifty ETFs, you get low-cost exposure to several stocks. Some of the best Nifty 50 ETFs are SBI Nifty 50 ETF, Nippon India ETF Nifty BeES, Motilal Oswal Midcap 100, Invesco India Nifty ETF, and UTI Mastershare Regular Plan-IDCW.

Ankur Aggarwal

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Hi all, I am Ankur Aggarwal – Digital Marketer, Entrepreneur, Traveller, Blogger, and Foodie. Have been blogging since 2010. In 2016 I scored 99.2 percentile in XAT Exam for MBA, left that to pursue my Online business dreams.
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