The world of investments and finances can certainly be intimidating most of the times for people who don’t know the ropes of its operation. But once a person gets the basic understanding of its concepts, they can expand their capital through various modes of investment. The Indian stock market isn’t the only place where traders go to play; the financial market has several other types of investments just in case stock markets aren’t for you, for example, the fund market which involves Mutual Funds, Hedge Funds, etc.
Just like Mutual Funds, there exist Exchange-Traded Funds or ETFs. Mentioned below is everything you need to know about ETFs.
What Are ETFs?
Exchange-Traded Funds or ETFs are funds similar to index funds, the difference being that they operate like the stock market. The rates of ETFs rise and fall throughout the day during trading hours just like stock market fluctuations. ETFs were introduced in India in the year 2001.
ETFs track an index, securities like bonds, share stock, or a commodity such as metal, etc. ETFs are different when compared to Mutual funds, being a marketable security. They are also more liquid than Mutual Funds. Unlike Mutual Funds, The Net Asset Value (NAV) of ETFs is not calculated at the closing of a trading day.
Advantages of ETFs
- Lower Cost of Acquisition: Apart from lower tax rates on ETF to be paid, an ETF purchaser doesn’t have to pay any advisory fee to the fund manager, effectively lowering his expenses to acquire ETFs.
- Lower Cost of Holding Commodity: Since ETFs are an intangible commodity which can’t be physically delivered, the owner just receives an ETF certificate, just like a share/stock certificate. This saves the owner’s holding costs.
- Easy to Analyse: The ETF market works similar to the stock market, which makes it easier for investors to quickly become comfortable and proficient in ETF investment.
- Diversification Along With Short Selling: Another benefit of investing in ETFs is that the investor acquires the diversification of an index fund, while being able to sell short. He can purchase as little as just one share in the fund as there is no lower limit present.
- Arbitrage:ETFs and the underlying securities can be traded throughout the day. This gives traders the advantage of arbitrage opportunities to trade ETFs at proximity to its fair value. If a trader purchases ETFs at a price lower than what he paid to own the basket of underlying securities, the trader can quickly sell off the latter and lock the difference as profit.
- Leveraged ETFs:Leveraged or inverse ETFs created by derivative products are used by some ETFs. Inverse ETFs are meant to track the opposite of the underlying securities gain. For example, an inverse ETF would gain 3% for every 3% drop in the asset.
Exchange-Traded Funds are a good alternative option for unconventional investors. The ease of trading in the stock market helps making good investment decisions in ETF trading. Since it is a promising investment vehicle for both small and big time traders, ETFs are a popular choice in the country.