Things to know before investing in ETF in India

There is a common notion among conservative investors and investment in market line schemes like mutual funds will always draw negative returns. However this is not true at all. There are some investors who are smitten away by the returns that these schemes offer and they end up investing far beyond their risk appetite. The fact remains that mutual funds are market linked schemes that invest in volatile equity markets. Investments in mutual funds are constantly exposed to market fluctuations. For short-term investors, there is a good chance of your portfolio incurring losses. These are some of the things that investors failed to keep in mind while making an investment in mutual funds. If you have a decent risk appetite and have an investment horizon of anywhere between 7 years to 10 years then you can invest in mutual funds and witness the true potential that these schemes have to offer over the long term.

However Mutual Funds are not restricted to equity funds. Market regulator SEBI has further categorised mutual funds for investors to be able to understand the investment objective of each of the schemes and invest in a fund who holds the potential to help them with their income needs. The categorisation is done based on certain characteristics such as investment strategy, risk profile, asset allocation investment objective etc. Other mutual fund schemes that are popular among investors apart from equity funds are exchange traded funds or ETFs. Exchange traded funds are quite popular among Indian investors because of the unique investment strategy. An exchange traded fund is an open ended scheme which tracks or replicates a particular index. Its total asset and exchange traded fund must invest a minimum of 95% in securities of an underlying index which it is tracking or replicating as a benchmark.

Things to keep in mind before investing in exchange traded funds in India

Here are some of the things every investor should keep in mind before investing in exchange traded funds:

Exchange traded funds are passively managed

Mutual Funds are categorised as actively managed funds and passively managed funds. Actively managed funds involve active participation of the fund manager who buys and sells securities in quantum with the scheme’s investment objective. A passive funds on the other hand has a low expense ratio as there is no active involvement of the fund manager. An ETF fund aims at generating capital income by tracking the performance of its underlying index with minimum tracking error.

One can invest in exchange traded funds via SIP

It is now possible to invest in exchange traded funds through a systematic investment plan. SIP gives ETF investors an opportunity to make systematic investments at regular intervals in a disciplined manner. However, investors are expected to get in touch with their brokerage firm and confirm whether they are offering the option of SIP.

Exchange traded funds offer liquidity

Mutual Funds like equity linked savings schemes (ELSS) come with a predetermined lock in period. Also, there are some retirement funds which come with a minimum lock in period of 5 years or till the investor attains the age of retirement. On the other hand, exchange traded funds do not have any lock-in period; this means that one can withdraw or invest in an INR exchange traded fund depending on their income needs. Since ETFs are liquid in nature, one can instantly redeem or withdraw these funds in case of a financial emergency.

Investments in exchange traded funds are supposed to offer capital appreciation over the long-term. However, these investments made in mutual funds are exposed to market risk. Hence, these investments do not guarantee any returns. Investors should consult their financial advisor before making an investment decision.

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