Passive investment is taking the investment world by storm. Globally, investors are starting to prefer passive investment strategies and passive funds overactive ones. There are many benefits that this offers, such as lower cost, better chances of long-term returns, etc. Here, we will talk about one such passive investment option, that is ETF or Exchange-Traded Funds.
ETFs are mutual funds that are listed and traded on stock exchanges, just like shares. These funds pool money from investors and invest in diversified securities including equities, bonds, commodities, etc while tracking an underlying index.
An ETF tracks an index like the Sensex or Nifty by investing in securities in the same weights as the index. ETFs are tradeable in the market. An investor needs to have a Demat account for investing in an ETF and executing any buy or sell transactions.
Some of the known benefits of ETFs are:
ETFs are preferred investment options because of their cost efficiency. The expense ratio of an ETF is often lower than 0.5% as compared to 2-2.5% that most actively managed equity funds charge. Lower fund management fee translates into incremental savings and therefore increased payouts for investors in the long-run.
ETFs are marketable securities that can be traded on registered indexes. Since these can be bought and sold at any time during trading hours, these offer higher liquidity in global markets when compared to regular mutual funds.
ETFs track an underlying index and the stocks held within the portfolio along with the proportion is known to investors. For example, the Nifty 50 comprises the 50 largest listed companies in India by market capitalisation. An ETF based on Nifty 50 will invest in these exact companies and in the same weights as the Nifty. The portfolio will also be rebalanced in case of changes in the index composition.
Since Exchange-Traded Funds track an Index, the fund manager’s investment decisions are not required. Therefore, ETFs are less affected by fund manager’s decisions or related errors. While these are prone to tracking errors, it can be usually ignored because of the quantum of impact.
Indian ETFs track diverse indexes such as Nifty, Gold, Nifty Next 50, Nifty Low Vol 20 Index among others. Active mutual funds rarely track such products.
Some of the drawbacks of ETFs are:
ETFs do not aim to outperform the market since the idea is to passively track an index. An actively managed fund, on the other hand, has chances of generating higher returns than the index, especially in emerging markets like India.
Since indexes like Nifty and Sensex mostly comprise mature companies, ETFs cannot tap the potential of companies that are in the growth stage and can generate higher returns, especially the ones in the small and mid-cap segments.
ETF investments require demat and trading accounts. Therefore, it may not be practical for investors who do not have these accounts. Mutual fund investors may not have such accounts as these are often not required for mutual fund investments.
Some of the common types of ETFs available for investment are:
These ETFs invest in shares of companies that are equity-focused. Equity ETFs also invest in other forms of equity of select organizations. Some of the recommended Equity ETFs are:
| Fund Name | Index Tracked | 1- Year Returns | 3-Year Returns | 5-Year Returns |
| Nippon India ETF Nifty BeES | Nifty 50 | 69.04% | 13.98% | 15.16% |
| Nippon India ETF Bank BeES | Nifty Bank | 99.04% | 9.03% | 15.28% |
| Motilal Oswal Midcap 100 | Nifty Midcap 100 | 98.96% | 11.34% | 14.53% |
| Motilal Oswal Nasdaq 100 | Stocks listed in the Nasdaq (US tech companies) | 37.65% | 26.94% | 26.68% |
These are commodity exchange-traded funds that primarily focus on building a portfolio of physical gold assets. The investment strategy involves purchasing shares of companies that enable the fund to own gold on paper, without the risk of asset protection. Some of the top-rated Gold ETFs are:
| ETF Name | 1 Year Returns | 3 Year Returns | 5-Year Returns |
| HDFC Gold Exchange Traded Fund | 1.58% | 14.37% | 9.49% |
| UTI Gold Exchange Traded Fund | 1.06% | 14.38% | 9.39% |
| Nippon India ETF Gold BeES | 1.33% | 14.43% | 9.32% |
Debt ETFs are also known as Bond ETFs. These ETFs trade or invest in fixed return securities like debentures, government bonds, etc. Here is an example of a Debt ETF in India:
| ETF Name | 1-Year Returns | 3 Year Returns | 5 Year Returns |
| Nippon India ETF Liquid BeES | 2.15% | 1.15% | 1.02% |
Currency ETF funds aim to generate profits through exchange rate fluctuations. They invest in different currencies based on predictions about the currency’s future performance. Currency ETFs closely follow stock exchange trends along with political and economic scenarios of various countries. Here are two commonly traded Currency ETFs in India:
Watch this You Tube video to learn about the top Index ETFs to invest in India:
ETFs take the mutual fund features to the next level by offering flexible trading, higher transparency, and portfolio diversification. These are expected to grow in the Indian market over the next few years with increasing investor awareness and readiness to try newer investment options.
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