How shares are traded in India? Many investors still don’t know about Exchange Traded Funds (or ETFs) and their advantages over traditional mutual funds.  In this article, we’ll examine Exchange Traded Funds, their history, performance and advantages and why you should never buy a mutual fund again.

Exchange Traded Funds Explained

what is share market response to ETF?

Exchange Traded Funds (or popularly known as ETFs) can most accurately be described as the amalgamation of a stock with a mutual fund.

Like mutual funds, when an investor buys an ETF, he is buying a pool of securities at one time.  For instance, an ETF known as DIA, or “Diamonds.” allows the investor to take a position in the Dow Jones Industrial Average.

Like a stock and hedge funds, an ETF can be purchased through a brokerage account, can be traded throughout the day, can be bought on margin and offers stock-like trading features such as limit orders, stop orders and short selling. Initially, hedge funds would sell short the stock market, thus providing a safety bracket against any stock market price droppings. Today the broader transaction is sort of similar to private investment partnership process. ETF somewhat differs from hedge funds. With booming economy, there are thousands of different hedge funds in India. Their core objective is to make money, and to incur profit by investing in all sorts of different investments and investments strategies. It is a win-win situation for investors and companies. However comparatively, most of the strategies for ETFs are more aggressive than the investments made by mutual funds.

A hedge fund is thus a private investment fund, which invests in a variety of different investments. The general partner chooses the different investments and also handles all of the trading activity and day-to-day operations of the fund. The investor or the limited partners invest most of the money and participate in the gains of the fund. The stock manager usually charges a small management fee and a large incentive bonus if they earn a high rate of return.

ETFs come in many different forms.  They track all the major indexes like the BSE Bankex, CNX IT, BSE Sensex, NSE Nifty and others.  They’re also available for investors who want to trade different sectors including energy, technology, precious metals, financial, health care, emerging markets, interest rates and many more.

Introduced in 2001 in share trading market, almost two decades ago in India, ETFs were initially mostly used by professional traders, but in recent years, have experienced rapid growth as a popular investment vehicle with public investors.

ETFs have gained such widespread acceptance and popularity because they provide significant advantages over mutual funds.

Advantages of ETFs

The advantages of ETFs include:

  1. Continuous pricing throughout the day compared to end-of-day pricing for mutual funds
  1. Can be sold short like a stock which is not possible with mutual funds
  1. Can be bought on margin
  1. Can use limit and stop orders so you can exit or enter during the trading day
  1. Have lower expenses than mutual funds and no management fees

Adding it all up, it’s easy to see why Exchange Traded Funds have been growing at a rate of nearly 20% per year since past 2 to 3 years in India. India’s ETF asset size has gone up to ₹ 1 lakh 30 thousand crores by end of 2019.

Stock trading in ETF advice

It’s easy to see why Exchange Traded Funds have steadily grown in popularity over the years, more so in the last decade.  By combining the benefits of a mutual fund with the benefits of a stock, they really do offer investors an optimum combination of flexibility and potential profit.

Of course, the large mutual fund companies don’t like ETFs but have had to adjust to their new popularity and so many fund families have introduced ETFs of their own in recent years.

For investors, ETFs offer considerable advantages of flexibility, cost and diversity, and therefore, you should never buy a mutual fund again.

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