There are a plethora of mutual fund schemes to choose from, but the fact remains is that one should only invest in a scheme which may hold the potential to help with their financial needs. The term wealth creation may have different interpretation for different people. Some may want to be build a long term corpus of Rs. 20 lakhs whereas some may want accumulate corpus worth Rs. 1 crore. If you want to build wealth smartly and without investing hefty amounts all at once, you may have to start investing early. If you are someone who carries a high risk appetite and wish to invest in a scheme that follows a passive investment strategy, you can consider investing in exchange traded funds.
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What is an exchange traded fund?
Mutual funds can be broadly categorized as active and passive funds. Active funds are open ended schemes where the fund manager is actively involved in trading with the underlying securities of the scheme to allow it to generate returns over the long term. On the other hand, passive funds like ETFs aim at generating capital appreciation by mimicking the performance of their underlying benchmark.
The units of exchange traded funds (ETFs) can be traded at the stock exchange just like any other company stocks. These are a little different from other mutual fund schemes where the investor can either buy or sell fund units only once in a day. On the contrary, investors can buy / sell their ETF fund units at their current market price during trading hours.
Which ETFs can you invest in 2021?
Depending on your investment objective, risk appetite, investment horizon and existing liabilities you may choose to invest in either (or all) of the following ETFs to target your financial goals.
Equity ETFs – Equity ETFs are open ended schemes that replicate the performance of stocks belonging to a particular index with minimum tracking error.
Gold ETFs –Gold exchange traded funds can be a smart alternative for investors who wish to invest in gold without having to do deal with the hassles of owning gold in physical from. One can now invest in gold as an asset class without having to buy it in actual form through gold ETFs.
Debt ETFs – Debt exchange traded funds invest in bonds, fixed income securities and other debt related instruments for generating capital gains.
International ETFs – International exchange traded funds invest in equity and equity related instruments of companies listed outside India. These funds invest in foreign securities or try to replicate the performance of a foreign fund to achieve their investment objective.
Why should you invest in exchange traded funds?
These days investing in conventional investment avenues doesn’t make sense as the interest rate on offer is outrageously low. Also, ETFs are passive funds which means the fund manager only reshuffles the investment portfolio from time to time. Since there is no active participation from the fund manager in managing the fund, the expense ratio of ETFs is relatively low. A low expense ratio means deductions from your capital gains will be less as compared to active funds.
Investors who do not want their investment portfolio to be actively managed, if they do not want the performance of their scheme to get affected by human biasness and want their returns to remain unaffected from human emotion, they can consider investing in ETFs. That’s because ETFs are designed in a way to replicate the performance of its underlying assets by investing in the same way as these securities invest in their benchmark.