What are exchange traded funds and NIFTY ETF funds?

[Kanika Shelatkar]

Exchange traded fund or ETFs are passive mutual funds which track particular market indexes, commodities like gold or some other assets. ETFs are listed on stock exchanges and trade just like shares. ETFs are passive funds, thus their expenses are also less and are very popular in developed economies like US and UK. However, ETFs are also increasingly becoming popular in India.

Let us explore exchange traded fund and how it can be helpful in your investments -

Can be used for your asset allocation to equities

ETFs can be the most efficient instruments to get exposure to equities as an asset class. In terms of risk, they are similar to diversified equity mutual funds, but it comes with much lower cost. Since ETFs track market indices, they are only subject to the market risks. There are no other risk involved in ETFs.

Nifty ETF can be the most suited instrument for asset allocation to equities as it is diversified across 50 stocks and various sectors. Nifty ETF is quite diversified and is relatively less volatile as it invest in top 50 stocks by market capitalization. As such, Nifty ETF, being the index of 50 largest companies, should form the core of your mutual fund portfolio.

Useful for diversification to broader market

While Nifty ETF may form the core of your portfolio, diversification in broader market exchange traded fund can provide you with additional sources of returns. You can invest in Nifty Next 50, i.e. the next top 50 stocks or Nifty 100 or Nifty Midcap 150 ETFs to get exposure to the broader market.

The factor you should keep in mind while investing in ETF is liquidity. You should invest in ETFs which are more actively traded in the market and have higher daily trading volumes.

Can be used for exposure to industry sectors

In addition to the core portfolio of diversified NIFTY ETFs, you can also add sector ETFs, like banking and financial services, IT, PSU, consumption etc. to your portfolio. However, you should have adequate risk appetite for investing in sector ETFs.

Give easy option to invest in Gold

Gold as an asset class, is important for asset allocation purposes. Gold ETFs are much more cost efficient compared to investment in physical Gold. Gold is also a hedge against inflation in the long term.

Easy exposure to international equities

International investing is also important from asset allocation perspective in India. ETFs can give you exposure to global companies and you can also benefit from rupee depreciation against global currencies. Some of the popular international ETFs are NASDAQ, Hang Seng, and FANG ETFs.

Now that we know about exchange traded fund and how various NIFTY ETF can help you diversify your investments across sectors and companies, you as an investor may have a query – where to get the ETF NAV?

Like any other mutual fund scheme, the NAV of exchange traded fund is also calculated at the end of the day daily, and published on the AMFI India website. However, investors should note that unlike other mutual funds, NAV or prices of ETFs changes frequently during the market hours on the stock exchanges as they trade just like any other listed shares.

Therefore, the rate at which you are buying or selling the ETF may not be the real NAV of the ETF scheme. Therefore, before buying or selling an ETF, you should check the actual NAV of the same and trade accordingly.