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Getting the most out of exchange traded funds (ETFs)

 

WORLDWIDE Exchange Traded Funds (ETFs) are gaining in popularity and their numbers as well as assets under management have risen significantly in recent years.

The situation in India is a bit different as these funds have failed to make the kind of impression amongst investors that was expected. There is a need to look at the offerings available in this space in terms of its actual benefits to consider the type of investment possible in this area. Here is a look at this category of funds from this perspective.

Nature: The nature of ETFs is such that they are mutual funds but they also have the features of a stock. These features refer to it being listed on the stock exchanges so being available for trade at various points of time during the day and at various prices instead of a single price dependent upon the net asset value at the end of the day like a normal mutual fund.

These funds are mostly in the nature of an index fund or they follow the price of an asset so there is no active management involved in the management of these funds.

There will not be any outperformance that can be talked about but this is able to provide a varied choice for the investors.

In India out of the ETFs present nearly one third of them are gold funds while the others are based on various indices and hence there is also quite a bit of choice that is available for the investor.

Specific niche: There are a lot of new ETF that are being planned by various fund houses but the existing ETF except gold ones have not found great interest among investors.

This could be on account of the fact that many investors are not very clear as to what are the benefits these funds actually provide. The manner in which one should look at these funds is that they are an option in front of the investor to ensure access to a specific area.

Thus, for example, an investor might be able to buy bank stocks and they might even buy a banking fund where they will depend upon the fund manager to ensure that the portfolio is such that they are able to gain from the investment.

However, might not have access to an investment that will give them exposure to a banking index. This is what the ETF will seek to do and hence there will be a different kind of exposure that will be possible for the investor.

Specific part of portfolio: The whole idea when looking at such funds for the investor is that they are able to fill in the various gaps that exist in their portfolio. There might be different kinds of exposure that is already built up from existing holdings and there would be the need for something more to meet specific individual requirements. However, this might not be readily available or it could be very costly to create that kind of exposure in the portfolio and in such a situation they can use the ETF to get the varied exposure that they require.

ETFs can be used by small investors to broaden their portfolio so it has use for this kind of segment and at the same time even existing investors who have a large portfolio with them will be able to benefit from this position. This is a low cost instrument because costs here will be lower than an actively managed fund.

This can be used as a sophisticated tool to ensure that there is a specific kind of flavour given to the portfolio that might not have been possible otherwise. The increasing choice in front of the investor will be a beneficial factor and help in increasing the choice for selection.

 

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Invest in SBI Mutual Funds Online

 

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