Apart from equity, debt or hybrid mutual funds that we have discussed earlier, another important instrument concerning mutual funds is Exchange Traded Funds or ETFs.
ETFs are a basket of securities that, in turn, is traded in the market. The securities can be anything – equity, bonds and derivatives.
ETFs are registered with SEBI.
How Do ETFs Work?
ETFs are generally traded in the stock exchanges and can be bought and sold similar to any equity share. They have a listing price that changes as per the price of the underlying assets. The dividends paid out by the shares in the basket of ETFs are paid out to the ETF holders.
ETFs can be based on a theme such as gold ETFs or can be general such as equity ETFs. They can also be actively or passively managed. In an actively managed ETF, the portfolio manager actively realigns the portfolio based on his knowledge and research. A passively managed ETF follows specific market indices, just like a passively managed mutual fund.
Who is it Ideal For?
ETFs are an excellent option for investors who do not have a lot of experience in the market.
How are ETFs Different from Mutual Funds?
Since both ETFs and mutual funds invest in a basket of securities, an obvious question is how the two are different?
Let us take a detailed look at the difference between the two:
Types of ETFs
ETFs can be of various types:
1. Equity ETFs
These ETFs invest in equity and equity-related investments.
These ETFs invest in fixed income instruments such as government bonds, corporate bonds, and debentures.
3. Gold ETFs
A very popular instrument, gold ETFs invest in physical gold assets. This helps investors to own gold without purchasing it physically. As a result, investors do not have to take the burdens of investing in physical gold, such as authenticity, selling, and storage.
4. Currency ETFs
The currency market is a very volatile global market producing innumerable opportunities for informed investors to make money. Currency ETFs invest in currency pairs and benefit from the fluctuations in the currency market. They are vastly affected by global economies.
Advantages and Disadvantages of ETFs
Gold ETFs vs Gold Mutual Funds
Another important question that may come to your mind is about the difference between gold ETFs and gold mutual funds.
Here are the main differences:
1. Gold ETFs invest in physical gold while gold funds invest in the shares of gold ETFs or shares of companies related to gold like Jewelry manufacturers.
2. One does not need a Demat account to invest in a gold mutual fund, unlike a gold ETF.