An ETF or exchange-traded fund is a pool of various securities that operates like a mutual fund. ETF trading started in 1993 but was only introduced in India in 2001. Since their introduction in the investment world, ETFs have been revolutionising the investing industry.
Similar to mutual funds, ETFs are a basket of securities. However, unlike mutual funds, ETFs can be bought and sold on stock exchanges. So, although an ETF is traded on an exchange like a stock, a single ETF offers much broader investment diversification than a single stock.
ETFs are structured to track any conceivable asset—an index, commodity, sector, asset, themes, currencies, and even investing strategies. Experts suggest that ETFs allow the democratisation of access to financial markets and strategies that were never even conceived of a decade ago.
There is a culture of innovation and entrepreneurship associated with ETFs. The latest technology, such as machine learning, is often used to construct ETF portfolios in myriad ways. For example, some ETFs use machine-learning algorithms for investment and tracking.
ETFs can be traded on the stock exchange during market hours and at prices that closely replicate the scheme's Net Asset Value (NAV). This makes ETFs highly liquid and transparent, even more transparent than mutual funds.
Investors are cautioned to check the fund's expense ratio when investing in mutual funds. Investors don't need to worry as much here as ETFs are passively managed schemes. As a result, the administrative charges associated with ETFs are low, translating to low expense ratios.
ETFs are far more tax-efficient compared to mutual funds. Due to their structure and the fact that they are passively managed, ETFs tend to generate fewer capital gains than actively managed mutual funds.
Perhaps, the primary way ETFs have revolutionised investing is by changing how people invest. Previously, investors would need to pick and choose the right combination of shares and stocks to beat the market. ETFs introduced the idea of not trying to beat the market at all. Instead, they attempt to replicate its performance. In doing so, ETFs are going one step further; it tries to be the market rather than beat it.
ETFs allow investors to invest a small amount to gain broad diversification. It also allows investors to dip their toes into a particular market or sector without hedging their bets on any particular company.
We expect technology to evolve in other areas of our lives; ETFs help do the same for our investments. ETFs are gathering momentum in India, so get ready and invest today!
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