Exchange-Traded Funds (ETFs) are investment vehicles that combine features of mutual funds and stocks. They offer diversification, liquidity, and cost efficiency, making them a popular choice among investors.
Key Concepts Explained
1. What is an ETF?
A fund that holds a basket of securities like stocks, bonds, or commodities.
Traded on stock exchanges like individual stocks.
Offers diversification and lower fees compared to actively managed funds.
2. Types of ETFs
Equity ETFs: Track stock indices like Nifty 50 or S&P 500.
Bond ETFs: Invest in government and corporate bonds.
Commodity ETFs: Invest in assets like gold, silver, or oil.
Sectoral & Thematic ETFs: Focus on specific industries or trends.
3. ETFs vs. Mutual Funds
Feature | ETFs | Mutual Funds |
Trading | Bought & sold like stocks | Purchased at NAV end of day |
Expense Ratio | Lower | Higher |
Minimum Investment | No minimum | Varies |
Liquidity | High | Moderate |
Step-by-Step Guide / Formula
1. How ETF Returns Are Calculated
Example: If an ETF starts at ₹100 and rises to ₹120 in a year:
2. Tracking Error in ETFs
A lower tracking error means the ETF closely follows its benchmark index.
Common Mistakes & How to Avoid Them
Ignoring Liquidity: Low-volume ETFs may have wider bid-ask spreads.
Assuming All ETFs Have Low Costs: Some thematic ETFs have higher expense ratios.
Not Understanding Tracking Error: High tracking error reduces index-matching performance.
Conclusion
ETFs provide a cost-effective way to diversify investments with stock-like trading flexibility. Investors should evaluate liquidity, expense ratios, and tracking errors before investing. For further learning, explore how index funds work and how to build a balanced investment portfolio.
FAQ Section
Q: Are ETFs better than mutual funds?
A: ETFs offer lower costs and better liquidity, but mutual funds may be better for SIP investors.
Q: What is the best ETF to invest in?
A: It depends on your goal. Nifty 50 ETFs are good for general market exposure, while gold ETFs hedge against inflation.
