Exchange-traded funds or ETFs have recently experienced major cash inflows. These funds are flexible, versatile and usually endowed with low expense ratios. This article will serve as a guide to investing in ETFs.
What is an ETF?
Exchange-traded funds are a type of mutual funds that comprise a collection of different securities such as bonds, equities, money market instruments, etc., that often track an underlying asset. Simply put, ETFs are a mashup of various investment options. They offer the best attributes of the two most popular types of investment – mutual funds and stocks.
ETF funds are relatively similar to mutual fund investments in terms of their regulation,structure, and management. What’s more, just like mutual funds, they are a pooled investment vehicle that offers diversified investment into varying asset classes such as stocks, bonds, currencies, commodities, options, or a blend of these. Moreover, they are traded like stocks on the stock market exchanges.
Types of ETFs
There are several types of ETFs available to suit the demands of almost all investors. Following are some types of ETFs available to an investor:
- Bond ETFs: These ETFs designed to offer exposure to different types of fixed-income securities like bonds. Investing in bonds is an excellent way to mitigate the ups and downs of investing and diversifying a portfolio.
- Inverse ETFs: These funds are designed to return the opposite of what is currently offered by its underlying market index. With these funds, stock prices move in the opposite direction of the inverse ETFs’ stock.
- Currency ETFs: These investments allow an investor to contribute in currency market transactions without purchasing a particular currency. The motive of these investments is to track and benefit from the price fluctuations of a specificcurrency or multiple currencies.
- Liquid ETFs: These securities try to minimise price risks and further enhance returns by investing in a basket of short-term securities, such as money and money market instruments with short maturities, while at the same time attempting to maintain safety and liquidity.
- Index ETFs: These funds track and try to copy the performance of their underlying index. They are further subdivided into representative and replication ETFs. Index funds that invest completely in the investments underlying the index are called replication ETFs. On the other hand, representative ETFs are those that invest a bulk of their fund corpus in representative samples and the remaining in different securities such as options, futures, etc.
- Gold ETFs: These securities provide investors with the path to hold privileges in the bullion market without making it obligatorytobuyphysical gold. As an investor, you can also buy ETFs that focus on precious metals in general.
ETFs are one of the fastest-growing financial investment options in history. Now that you are armed with the basics of exchange-traded funds in India make up your mind and decide whether they make sense for your portfolio.Remember, whether you decide to invest in mutual funds online or not, make sure that they are in line with your investment portfolio. Happy investing!
