Curated By: Business Desk
Last Updated: October 05, 2023, 19:53 IST
ETFs typically track a particular index.
As the name suggests, the ETFs can be traded on the stock exchanges anytime during the trading hours. You can buy or sell ETFs at the current price of a trading session.
When you start earning money, it becomes crucial to exercise caution and mindfulness when seeking to grow your wealth through various investment schemes. Among the multitude of options available, Exchange-Traded Funds (ETFs) stand out as an investment instrument due to the higher return they offer.
Investors often confuse between ETFs and Mutual funds due to many similarities. Let’s take a look at what ETFs are and how they differ from Mutual Funds. It’s important to know how much return you will receive before investing in any of these investment instruments.
What are Exchange-Traded Funds (ETFs)
ETFs are essentially Index Funds that are listed and traded on exchanges just like the stocks. On a global scale, ETFs have introduced a new dimension of investment opportunities, catering to both retail and institutional investors.
An ETF represents a basket of stocks that mirrors the composition of an index, such as the Nifty or BSE Sensex. Some ETFs track broad stock indices, creating diversified portfolios, while others focus on specific industries. ETFs invest in assets like stocks, bonds, futures contracts or commodities like gold.
As the name suggests, the ETFs can be traded on the stock exchanges anytime during the trading hours. You can buy or sell ETFs at the current price of a trading session.
Investing in ETFs offers potentially higher returns compared to other investment options. For example, Kotak PSU Bank ETF has delivered an impressive return of 74.61 per cent over one year and 59.76 per cent in the last three years. Similarly, Motilal Oswal’s NASDAQ 100 ETF boasts a one-year return of 31.9 per cent and a three-year return of 12.86 per cent.
It’s common for individuals to confuse ETFs with Mutual Funds, which are investment vehicles managed by experts who oversee investments in stocks and bonds. However, there are two key distinctions between ETFs and Mutual Funds. Firstly, Mutual Funds can be bought or sold at any time, whereas ETFs can only be traded when the stock market is open. Secondly, both Mutual Funds and ETFs typically do not have a minimum lock-in period, but early withdrawals from certain Mutual Funds may incur fees.
Which Is Better?
In Mutual Funds, professional investment managers known as fund managers oversee the growth of your money. They conduct in-depth market analysis and closely monitor investment portfolios. While Mutual Funds may charge higher fees, their expertise can potentially lead to greater profits. ETFs, on the other hand, offer simplicity and cost-effectiveness. They come with lower fees, making them a more affordable option, but they also entail higher inherent risks. If you are willing to deal with a high risk asset against potentially higher profits, then ETFs could be a better option. ETFs may align better with your investment strategy if you are looking for more flexibility and liquidity.
