Why Invest In Exchange Traded Funds?

By Author: Shreya
Total Articles: 5
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Mutual funds India offers a unique range of funds to choose from various categories. The fund categories are broadly classified into 5 broad basket of funds – Equity, debt, hybrid, solution oriented and other category of schemes. The other category of schemes consists of Index / ETF funds and fund of fund (FOF) domestic and overseas.
The above rationalization was done by SEBI in the year 2017, post which AMCs were permitted to have only one scheme in each category, excepting index funds/ exchange traded funds which track different indices. According to SEBI classification, index/ exchange traded funds are open ended schemes replicating/ tracking a particular index. Index funds/ exchange traded funds should invest at least 95% of the scheme assets in securities of a particular index which is being tracked / replicated.   
The mutual funds India category of exchange traded fund is becoming popular at a very fast pace in India. In the last 3 years assets under management (AUM) of ...
... ETF or exchange traded fund has grown at a compounded rate of over 45% (source: AMFI). The mutual fund industry in India now has ETF mutual funds across several asset classes e.g. equity, debt, gold, silver etc. ETFs also have multiple market capitalization segments and industry sectors.
What is an exchange traded fund?
An exchange traded fund is a passive mutual fund investment that track benchmark market indices like NIFTY, Sensex, Bank NIFTY etc. There are ETFs which also track prices of commodities like Gold and Silver. To track a particular index, ETFs invest in the same basket of securities that replicate the benchmark index. One important point here is that an exchange traded fund does not aim to beat the returns of the benchmark indices it tracks. Rather, it tries to replicate the returns of the said benchmark subject to tracking errors.
Unlike other mutual funds India schemes, exchange traded fund is listed on the stock exchanges and are traded just like any other stocks. To invest in these funds, you need to have demat and trading account.
Benefits of investing in ETFs

Low cost - Total expense ratio (TER) of an exchange traded fund is much lower compared to actively managed schemes. As you may know, TERs have a direct bearing on scheme returns because TERs get adjusted in the scheme net asset value (NAV).
Lower risk - Actively managed mutual funds are either overweight / underweight on certain stocks or sectors relative to the benchmark index as they always aim to beat the benchmark index returns. This gives rise to unsystematic risk in the scheme. Unsystematic risk is the incremental risk over and above market risk, which all mutual funds are subject to. Exchange traded funds are only subject to market risk as they must invest 95% of the scheme portfolio in a basket of securities that replicate the market index it is following.
No fund manager bias - Unlike actively managed mutual funds there is no fund manager bias in an exchange traded fund. Due to this, exchange traded funds are much simpler to select. All you must check is if the fund has been able to replicate the returns of the benchmarked indices.

 
In this article, we discussed what exchange traded fund is, its objective and the benefits of investment in it. Mutual fund investors should consult with their distributor or financial advisors if exchange traded fund is suitable for meeting their investment needs.