If you knew mutual funds then understanding exchange-traded funds become easy for you. If you don’t then feel free to read this blog. Because we’re going to look at some basics about ETF that help you to start investing in it.
In this blog, you’ll look at what are ETFs? what are the types of ETFs? benefits of exchange-traded funds(ETFs), and what is the difference between ETFs and mutual funds?
What are Exchange-Traded Funds(ETFs)?
Exchange-traded funds, as their name suggests, it is traded on the exchange just like stocks. ETF is a type of security that tracks a specific index(like Nifty and Sensex), meaning that it holds the same securities of the basket as the index.
Some ETF represents bond indexes, others represent equity indexes. More ETFs represent various indexes such as real estate, gold, commodity, etc…
Types of ETFs
There are various types of ETFs traded in the market. but here we look at some of the popular ETFs in brief:
Investing in bond ETFs can provide regular income. Its performance depends on the performance of its underlying bonds. if you want a safe investment than stock then this is the best for you.
There are two types of investing in stocks indirectly or directly: directly when you invest all by yourself. indirectly when you invest through ETFs. If you don’t have time to analyze a stock and follow news through then investing in ETFs can wise choice you can make.
Most of the time you can get an idea from their name to which type of index that they follow. As industry ETFs, you can predict that in which type of index they follow. Industry ETFs are focused on a specific industry. These ETFs are best when you’re bullish on some specific industry. You can also track these ETFs to check how some specific industries are performing.
Commodity ETFs invest in commodities like crude oil, grain, etc. It is best when you want to diversify your portfolio. It focuses on either a specific commodity or several commodities.
Want to invest in gold but not actually(means buying real gold) then you can prefer these gold ETFs to invest in the growth of the gold. Also, there are metals you can invest in, like silver and other types of precious metals.
These ETFs track the performance of an underline index such as nifty, Sensex, BSE 100, etc. They invest in the same stocks as their underline index. Because they invest in the same securities as their underline index so their returns are also the same, not more or less.
Difference between ETFs and Mutual Funds
ETFs are the same as mutual funds, but with some essential differences.
The major difference Between mutual funds and ETFs is how they are traded. Mutual fund shares only can be sold and bought from the mutual fund company. And its share only can be bought at the closing price of the day. ETFs are traded over an exchange thereby you can buy and sell ETFs just like stocks.
The mutual fund has a minimum price for buying on the other hand ETF doesn’t have. For example, if a mutual fund has a minimum price of Rs.500 and its net asset value(you can think of it as a stock price) is Rs.50. So in a mutual fund, you can’t buy 1 share of it, you need to buy at Rs.500 and then you will receive 10 shares of a mutual fund. In contrast, ETF can be bought and sold at its net asset value.
But, always prefer buying ETFs in large quantities or large amounts. Don’t forget that ETF has a brokerage charge. If you buy 1 share of ETF at a price of Rs.500 and the brokerage charge is 50 then you are at a loss of 10% just after buying. It’s applicable for other stocks either.
If you look at the tax of the mutual fund and ETFs, ETFs create less taxable events than mutual funds, thereby you can get more of your money. But every time you sell shares you get taxed at your tax bracket rate, only if there is the capital gain on your investments.
Another difference is transparency, In ETF investors can see exactly what stocks are bought and held by their ETF. But in a mutual fund, they only have to require their holding twice a year. Why does this help you? it prevents you from not buying a mutual fund that holds the same securities.