A Brief Overview of the Types of Exchange-Traded Funds in India

Investments in different financial instruments are slowly gaining popularity and traction in India. The income earned from your profession is inadequate to meet your needs, especially when there is inflation. You need an additional source of earnings through investments in the Share Market. It becomes easy to save for the future and other essential requirements.

The Exchange-Traded Fund, or ETF, is an innovative investment option that gives investors the flexibility to invest in a basket of securities that are part of the indices of a stock exchange. They mimic the performance of an underlying index. You can buy and sell them, just like shares.

Types

There are different instruments available for investing in ETFs in India. The goals, funds invested, and potential returns vary depending on the type. The following are the types of funds to invest in:

Equity ETFs

Nifty ETFs are the cheapest Equity Funds in India. They are passive investment instruments that combine Equity Funds’ simplicity and Stock Investments’ flexibility. Equity ETFs trade on an exchange like other company stocks, which you can buy or sell continuously at market prices in real-time.

Liquid ETFs

These invest in short-term maturity and money market instruments such as Tri-Party Repos. They are highly liquid and collateralised and provide returns closely corresponding to the underlying market index, subject to a tracking error. As part of the index, you get exposure to fixed-income instruments like Government Bonds and Debentures of companies when you invest in Liquid ETFs.

Commodity ETFs

They are commodity-based funds investing in gold, silver, and other assets whose Net Asset Value changes daily. You invest in stocks instead of the actual metal. Since gold prices on the exchanges are available to the public, you can identify the value of your investment portfolio, thus maintaining transparency.

Fund of Funds

They are Mutual Fuds investing in other Mutual Funds offered by numerous Asset Management Companies. Investors can benefit from diversification and investing in various Equity, Debt, and Commodity ETFs. Experts believe Fund of Funds is generally suitable for smaller investors to access different asset classes.

Trading process

For investing in an ETF, you require a Demat and Trading Account for buying and selling your fund units. But if you trade in a Fund of Funds, you buy and sell units like any other traditional Mutual Fund without opening them. Before investing, read the terms to understand the asset allocation and avoid losses later. Check the risks with your advisor and try mitigating them to attain your investment goals.

Conclusion

All Mutual Funds involve market risks. You should carefully refer to the offer documents before investing. Know that the market is never constant. Even small fluctuations can affect the returns. Hence, it is best to approach an investment advisor to measure your risk appetite and assist in attaining your goals.

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