Everything You Need To Know About Investing In ETFs In India

Since their inception in the United States in 1993, Exchange-Traded Funds (ETFs) have reshaped the investment landscape, transcending borders to gain prominence in global markets, including India, where investing in ETF is now a prime consideration for individuals building their portfolios. Despite their burgeoning popularity, many Indian investors remain unfamiliar with the intricacies of ETF investing and grapple with aspects such as how to invest in ETF, what is ETF investment, best ETF in India, gold ETF, silver ETF, SIP in ETF, etc. In this comprehensive guide, we aim to demystify investing in ETF, equipping first-time investors with a profound understanding of their structure, categories, advantages, and crucial factors for selection. Read on to know all about best ETF funds in India, benefits of ETF investment and other aspects.

Understanding investing in ETF

At its essence, an ETF represents a fusion of mutual funds and individual stocks. Similar to traditional mutual funds, ETFs pool funds from investors under the guidance of professional fund managers and compute Net Asset Values (NAVs) to reflect the fund's performance. However, two distinct features set ETFs apart. Firstly, ETFs are Exchange-Traded, enabling investors to trade shares on stock exchanges throughout the trading day, offering liquidity akin to individual stocks. Secondly, ETFs predominantly utilise passive tracking strategies, seeking to replicate the performance of benchmark indices like Nifty or Sensex by investing in constituent stocks in proportion to their weights within the index.

ETFs vs. Stocks vs. Mutual Funds

Comparing ETFs with individual stocks and mutual funds elucidates their unique characteristics and benefits – ETFs offer investors diversified exposure and market liquidity, similar to mutual fund, while providing the flexibility of trading throughout the day, akin to individual stocks. In contrast, individual stocks provide direct ownership in specific companies, subjecting investors to company-specific risks. Mutual funds pool investments across various asset classes, offering diversification but with limited control over individual investments.

ETF categories: A deep dive

ETFs span a diverse range of categories tailored to cater to varying investor preferences and objectives –

• Equity ETFs: These ETFs mirror the performance of stock market indices or specific sectors, providing investors with exposure to broad market movements or targeted sectoral investments. Equity ETFs may focus on large-cap, mid-cap, or small-cap stocks, catering to different risk appetites and investment objectives.
• Gold ETFs: Offering a hedge against currency volatility and economic uncertainty, gold ETF enable investors to participate in the gold bullion market without the logistical complexities of physical ownership. Gold ETFs track the price of gold and provide investors with an efficient way to invest in this precious metal.
• ETFs with international exposure: These vehicles provide investors with access to foreign markets, enabling geographical diversification and capitalizing on global growth opportunities. International ETFs may focus on specific regions or countries, allowing investors to tap into the potential of emerging markets or established economies.
• Debt ETFs: Investing in fixed-income assets, debt ETFs offer cost-effective alternatives to traditional debt mutual funds, providing exposure to bonds and other fixed-income securities. Debt ETFs may focus on government bonds, corporate bonds, or a combination of both, offering investors varying levels of credit risk and yield potential.

Benefits of investing in ETF

ETFs offer a plethora of advantages, underscoring their appeal to investors, as listed below –

• Liquidity and flexibility: ETFs, like individual stocks, are traded on stock exchanges, ensuring liquidity and enabling investors to buy or sell shares at prevailing market prices throughout the trading day. This liquidity allows investors to enter or exit positions quickly and efficiently, without having to wait for the end of the trading day.
• Market value trading: ETF shares are traded at market values, presenting opportunities for gains if market sentiments favour the underlying sectors or markets tracked by the ETF. This market-driven pricing mechanism allows investors to capitalise on short-term market trends and adjust their investment strategies accordingly.
• Inexpensive management: ETFs typically exhibit lower expense ratios compared to actively managed mutual funds, enhancing returns by minimising management costs. The passive nature of most ETFs reduces the need for active portfolio management, resulting in lower operating expenses and higher net returns for investors.
• Diversification: ETFs offer investors diversified exposure to a wide range of asset classes, sectors, or regions, reducing portfolio risk and enhancing long-term returns. By investing in a single ETF, investors can gain exposure to multiple securities, industries, or countries, mitigating the impact of individual stock or sector-specific risks.

Select the right ETF

Navigating the ETF landscape requires a systematic approach to selection and you can practice the same by first determining the desired exposure, whether it is equities, gold, international markets, or fixed income, in alignment with your investment objectives and risk tolerance. Remember to opt for ETFs with substantial trading volumes to ensure liquidity and ease of trading, mitigating the risk of liquidity constraints and always scrutinise the expense ratio of ETFs, selecting those with lower fees to maximise returns over the long term. Further, assess the tracking error of ETFs, and prefer those with minimal deviations from the benchmark index, as this ensures accurate replication of index returns.

ETFs represent a versatile and accessible investment vehicle for Indian investors seeking diversification, liquidity, and cost efficiency in their portfolios. With a comprehensive understanding of ETFs, investors can unlock their potential to optimise portfolio performance and achieve long-term financial goals. Embracing ETFs empowers investors to navigate the complexities of the market with confidence and agility, laying the foundation for sustainable wealth accumulation and financial prosperity. By incorporating ETFs into their investment strategies, Indian investors can capitalise on market opportunities, mitigate risks, and build robust portfolios for the future.

An investor education initiative by Edelweiss Mutual Fund

All Mutual Fund Investors have to go through a one-time KYC process. Investors should deal only with Registered Mutual Fund (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit - https://www.edelweissmf.com/kyc-norms  

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME RELATED DOCUMENTS CAREFULLY