An ETF is a marketable security that tracks a stock market index, a commodity, bonds, or a combination of assets, much like an index fund. In India, investors can choose from a diverse range of ETFs, making it an appealing option for investors who want to diversify their portfolios. This article explores the advantages and drawbacks of investing in ETFs in India, offering insights for potential investors.
What are the perks and drawbacks of an ETF investment in India?
Let’s take a look at the advantages of investing in ETFs:
- ETFs offer the advantage of intraday purchases as opposed to index mutual funds
Investors can buy exchange-traded funds throughout a trading day like individual stocks. Investors can capitalise on price fluctuations and execute intraday trading strategies thanks to this feature. Investors can only buy or sell index mutual funds at the end of the trading day at the net asset value (NAV) price. This flexibility can especially be advantageous for active traders and those looking to time the market.
- ETFs charge lesser fees from investors
Exchange-traded funds generally have lower expense ratios compared to actively managed mutual funds. The lower fees mean higher earnings for investors over time, as this involves lesser fund management fees.
- These funds are easy to trade
ETFs are listed on stock exchanges, and they provide investors with the freedom to buy and sell their shares whenever the stock exchange is open for trading.
- ETFs are transparent investment options
Exchange-traded funds make their holdings public daily and allow investors to track the composition of their underlying assets. This transparency helps investors make informed decisions and minimises the risk of unexpected surprises.
Points to bear in mind while investing in an ETF
While ETFs have numerous advantages, there are a few considerations investors should keep in mind:
- Investors require a demat account to invest in an ETF
Unlike mutual fund investments, which can be held directly with the fund house, ETF investments require investors to have a demat (dematerialised) account. A demat account is essential for holding and trading ETF units, as they are listed on stock exchanges. This requirement may pose as an initial hurdle for individuals not familiar with demat accounts, but it is a necessary step to access the ETF market.
- Investors should consider tracking errors
Investors should be aware of the concept of tracking errors when investing in ETFs. A tracking error measures the difference between the performance of an ETF and its benchmark index. While ETFs are designed to closely mimic their underlying indices, tracking errors can occur due to various factors, including management fees, trading costs, and dividend distributions. Monitoring the tracking errors can help investors assess how closely an ETF tracks its benchmark and whether it meets their investment goals.
Investors must conduct thorough research and consult with financial experts to make informed decisions regarding ETF mutual funds and the types of ETFs that best suit their investment objectives in the dynamic Indian market.
