Understanding ETFs: Why They Are Better Than Ordinary Mutual Fund Schemes

A Comprehensive Guide to Investing in ETFs

Exchange-Traded Funds (ETFs) have gained significant popularity among investors due to their unique advantages. In this blog post, we will define what ETFs are, explain why they are better than ordinary mutual fund schemes, and answer some of the most frequently asked questions about ETFs.

What is an ETF and How Does It Differ from a Mutual Fund? +

An ETF is a type of investment fund that is traded on stock exchanges, similar to individual stocks. ETFs typically track an index, a commodity, bonds, or a basket of assets. Unlike mutual funds, ETFs can be bought and sold throughout the trading day at market prices. This flexibility makes ETFs an attractive option for investors who want to take advantage of intraday price movements.

There are two varieties of ETFs:

  • Listed ETFs: These are traded on stock exchanges and can be bought and sold like stocks at any time during the trading day. You need a Demat account and a trading account to invest in these ETFs.
  • Fund of Fund ETFs: These are offered by mutual fund AMCs and can be operated through ordinary mutual fund platforms. However, they are not traded intraday but are valued on a daily basis like other mutual fund schemes. These ETFs are usually based on an index and are suitable for low-risk investors following a passive investment strategy.
Why Are ETFs Better Than Ordinary Mutual Fund Schemes? +

ETFs offer several advantages over traditional mutual funds:

  • Lower Expense Ratios: ETFs generally have lower expense ratios compared to mutual funds because they are passively managed and do not require active management.
  • Tax Efficiency: ETFs are more tax-efficient due to their structure. They generate fewer capital gains distributions, which can help investors save on taxes.
  • Intraday Trading: ETFs can be bought and sold throughout the trading day, allowing investors to take advantage of market movements.
  • Diversification: ETFs provide diversified exposure to specific indices or sectors, reducing the risk associated with individual stocks.
Which is Better, Index Mutual Fund or Niftybees? +

Both index mutual funds and Niftybees track the Nifty 50 index, but they have slight differences. Index funds are managed by a fund house, while Niftybees are Exchange Traded Funds (ETFs). For long-term, passive investing, both are suitable.

Example:

  • Index Mutual Fund: An investor looking for a long-term, passive investment might choose an index mutual fund managed by a reputable fund house. These funds are valued at the end of the trading day and can be bought or sold at the NAV (Net Asset Value).
  • Niftybees: An investor who prefers the flexibility of intraday trading might opt for Niftybees. These ETFs can be bought and sold throughout the trading day, allowing the investor to take advantage of market movements.
Investing in Goldbees or Purchasing Gold Coins for Longer Duration (Min 10 Years), Which is Better? +

Investing in Goldbees, which are gold ETFs, can be a more convenient and cost-effective way to gain exposure to gold compared to purchasing physical gold coins. Gold ETFs offer liquidity, ease of trading, and lower storage and security costs. Buying gold coins from jewelers may involve indirect charges and purity issues. Earlier, banks sold pure gold coins, but this is no longer the case. Alternatively, investing in gold bonds can be a better option than gold coins.

What are the Best ETFs to Invest In? +

The best ETFs to invest in depend on your investment goals, risk tolerance, and time horizon. Some popular ETFs include those that track broad market indices like Nifty or Sensex, sector-specific ETFs, and thematic ETFs. It's important to consider your financial objectives and risk profile when selecting ETFs.

How Do I Invest in ETFs? +

You can invest in ETFs through two main methods:

  • Through a Demat Account and Trading Platform:
    • Pros: Allows intraday trading, providing flexibility to take advantage of market movements.
    • Cons: Requires a Demat account and a trading account, which may involve additional costs and complexity.
  • Through Mutual Fund Platforms (Fund of Fund ETFs):
    • Pros: Can be operated through ordinary mutual fund platforms, making it easier for those already familiar with mutual funds.
    • Cons: Not traded intraday; valued on a daily basis like other mutual fund schemes.

Opening a brokerage account and selecting the right ETFs based on your investment goals is the first step for trading through a platform. For other categories of ETFs, you can buy through mutual fund channels.

Conclusion

ETFs offer a flexible, cost-effective, and diversified way to invest in the market. Whether you are a long-term investor or a short-term trader, ETFs can be a valuable addition to your investment portfolio. If you have any further questions or need more personalized advice, please feel free to reach out to us.