An exchange traded fund is an open ended mutual fund scheme that mimics the performance of a particular index, commodity, asset class or benchmark for generating capital appreciation. Investors can purchase exchange traded fund units at the stock exchange just like any other company stock. ETFs can be modelled to track anything that can range from a commodity like gold or currency to a basket of securities. Since ETF units are brought and sold everyday at the stock exchange, its NAV tends to fluctuate regularly. Since these funds can be traded at the exchange, they get the name exchange traded funds.
Exchange traded funds are different from other mutual fund schemes. Regular mutual funds aren’t traded at the exchange, they are only traded once the exchange closes. On the other hand, exchange traded funds are constantly traded when the markets are open, and you cannot buy ETF units once the exchange closes.
According to market regulator SEBI (Securities and Exchange Board of India), the regulator of securities and commodities in India, an exchange traded fund – “is an open ended scheme which replicates/tracks the particular index. Of the total assets, this fund must invest a minimum of 95 per cent in securities of a particular index (which is being replicated or tracked)”.
How do ETFs work?
ETFs are available for trading on almost all exchanges. The performance of an ETF determines whether its investors will receive dividends. The NAV of an ETF can change depending on how its underlying assets perform. They share similar traits with other mutual funds – have an investment objective, investment strategy, fund management. Since most ETFs track the performance of its underlying assets, these are considered to be passively managed funds.
Targe life’s long term goals by investing in ETFs
ETFs invest in a diversified portfolio of securities which allows its portfolio to perform efficiently over the long term. Since the portfolio is diversified, even if one asset class or sector underperforms, other asset under the portfolio compensate by showing exceptional growth. When you in invest in a diversified ETF scheme, you benefit as you hold a percentage in several expensive company stocks. Having equities in promising companies only means that your investments can benefit from the growth of these organizations.
To achieve life’s long term financial goals, investors must succeed in building a commendable corpus. They can do so by investing in various asset classes through ETFs. This way, even any one asset class flounders, investments in other asset classes can offer the necessary cushion. It is less likely for all asset classes to perform in tandem all at once. For example, if equity asset class underperforms, gold as an asset class can act hedge against falling markets.
Investors can start a monthly SIP in ETFs and easily target their life’s long term goals. A Systematic Investment Plan works in a simple manner; thus, it is not confusing even for those who are new to mutual fund investing. SIPs allow investors to invest small fixed amount at regular intervals. Investors can also refer to SIP calculator, a free online tool that draws a rough estimate on the capital gains that you will receive at the end of your investment journey.
If you have any long term goals that need a wealth creation plan, you should consider starting a monthly SIP. SIPs ensure that you save and invest regularly till your investment objective is achieved.
ETF is a high volatile investment scheme that doesn’t guarantee capital appreciation. Investors are expected to seek professional consultation before investing.