Frequently Asked Questions
An ETF, or Exchange Traded Fund, is a type of investment fund that is traded on the stock exchange, just like a stock. In India, all ETFs are passively managed and are designed to track specific indices, such as the NIFTY 50 or SENSEX. Because they follow indices and don’t require active management, ETFs are low-cost and a simple way for investors to gain exposure to a wide range of stocks or sectors.
To invest in ETFs, you need to open a brokerage account, research the ETFs you want to invest in, and place a buy order through your broker. ETFs are traded like stocks, so you can buy and sell them throughout the trading day at market prices.
ETFs offer several advantages, including diversification, lower expense ratios compared to mutual funds, flexibility to trade like stocks, and access to various asset classes and sectors. They are also tax-efficient and suitable for both short-term and long-term investment strategies.
While it’s not guaranteed, many actively managed mutual funds fail to consistently beat the indices they aim to outperform. This trend becomes even more noticeable during bear markets, when market-wide declines make it challenging for fund managers to deliver excess returns. ETFs, by tracking indices, often provide a reliable and lower-cost alternative, especially in such conditions.
Yes, ETFs are an excellent choice for beginners. They offer a simple way to start investing with a diversified portfolio. Their low expense ratios and ability to track indices make them a cost-effective and straightforward investment option.
While both ETFs and mutual funds pool investors' money to invest in a diversified portfolio, they differ in key ways. ETFs trade like stocks on an exchange and have lower expense ratios, while mutual funds are bought and sold at the end of the trading day at the fund's net asset value (NAV).
Before buying an ETF, consider the following:
- Expense Ratio: Lower expense ratios mean less cost to you over time.
- Tracking Error: Check how closely the ETF tracks its benchmark index.
- Liquidity: Highly liquid ETFs are easier to buy and sell at favorable prices.
- Underlying Index: Understand the index or asset class the ETF tracks.
- Performance History: Review the ETF's past performance, though it’s not a guarantee of future returns.
- Fund Size: Larger funds tend to have better liquidity and lower tracking error.
- Fund House: Consider the reliability and track record of the ETF provider.
Yes, many ETFs distribute dividends to their investors. These dividends are typically derived from the underlying assets held by the ETF and are distributed at regular intervals, depending on the ETF's policy.
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