Exchange Traded Funds have been of great interest in the recent years. They provide a low cost and rule based investment opportunity in the markets. In simple terms, ETFs are mutual funds that trade on a stock exchange. While ETFs share a few similar traits with mutual funds; it is their resemblance to stocks that has gained traction among investors. They represent a basket of securities that tracks indices such as Sensex or Nifty, much like index mutual funds. ETFs experience price fluctuation throughout the day. This flexibility of trading proves beneficial to exit and enter at a defined price. In addition ETFs are rule based which ensures that the strategy of investment is well known in advance. Most ETFS track an index and do not aim at beating the index. Indian ETF industry has come a long way since its foundation in 2001. This is propelled by the success of Gold and CPSE ETFs amongst retail investors and channeling of part of employee provident funds into markets by the EPFO. As per a Bloomberg report in 2017, India was world's second-fastest growing exchange traded funds (ETF) market, behind only Japan. The ETF industry is still at a nascent stage in India. This is partially due to lack of knowledge about the product.
Globally, specifically in the US, the interest in ETFs has grown many times, given its success in returns, innovations and availability of diverse underlying assets. In order to attain similar market outcome in India, we need a large number of participation by Indian investors and more importantly, awareness about ETFs. An understanding how ETFs differ from their conventional counterparts and their role in our portfolio is important. ETFs are more cost-effective than traditional mutual funds given that they are managed passively. Tracking error is another gain for ETFs over conventional index funds. Tracking error is the difference between returns of the fund (ETF or index) and the returns generated by target index. Then there are advantages of getting listed on stock exchange. Since ETFs are traded like stocks investors enjoy benefits of short selling and buying on margin. Plus, ETFs make a potential tool for gaining instant exposure to the security markets through cash equitization. In some cases, investing in ETFs can be wiser than single stock investments. This is because ETF spreads its risk across different assets instead of focusing on specific firm's stock. This can help mitigate losses occurred during downtrend of the market Exchange-traded funds are very powerful instruments to diversify ones investing strategies. A combination of active and passive management can effectively harness the result by using each strategy to minimize risks caused by the other. ETFS are also suited for new to market investors especially through a Systematic Equity Plan.
ETFs try to mimic the performance of indices. These indices can be a simple market-cap index (like Nifty or Sensex) or a factor index. Because indices are rule based, investing in ETFs are cost effective and transparent with respect to the investment strategy. ETFs can be purchased on exchange on real time price that changes depending on the demand and supply in the market.
Globally, specifically in the US, the interest in ETFs has grown many times, given its success in returns, innovations and availability of diverse underlying assets. In order to attain similar market outcome in India, we need a large number of participation by Indian investors and more importantly, awareness about ETFs. An understanding how ETFs differ from their conventional counterparts and their role in our portfolio is important. ETFs are more cost-effective than traditional mutual funds given that they are managed passively. Tracking error is another gain for ETFs over conventional index funds. Tracking error is the difference between returns of the fund (ETF or index) and the returns generated by target index. Then there are advantages of getting listed on stock exchange. Since ETFs are traded like stocks investors enjoy benefits of short selling and buying on margin. Plus, ETFs make a potential tool for gaining instant exposure to the security markets through cash equitization. In some cases, investing in ETFs can be wiser than single stock investments. This is because ETF spreads its risk across different assets instead of focusing on specific firm's stock. This can help mitigate losses occurred during downtrend of the market Exchange-traded funds are very powerful instruments to diversify ones investing strategies. A combination of active and passive management can effectively harness the result by using each strategy to minimize risks caused by the other. ETFS are also suited for new to market investors especially through a Systematic Equity Plan.
ETFs try to mimic the performance of indices. These indices can be a simple market-cap index (like Nifty or Sensex) or a factor index. Because indices are rule based, investing in ETFs are cost effective and transparent with respect to the investment strategy. ETFs can be purchased on exchange on real time price that changes depending on the demand and supply in the market.
No comments:
Post a Comment