Are Exchange Traded Funds The Right Investment For You?

Exchange Traded Funds (ETFs) have emerged as a popular investment option in India, providing investors with a convenient and cost-effective way to gain exposure to a diversified portfolio of securities. These funds have achieved significant traction due to their unique characteristics and potential benefits. Vardan Pandhare explores the world of ETFs as an investment avenue

- Vardan Pandhare

Exchange Traded Funds (ETFs) are a type of investment fund that are traded on a stock exchange. They are similar to mutual funds, but they have some key differences. ETFs are passively managed, which means that they track a specific market index such as the Nifty or the Sensex. This implies that they are less expensive than mutual funds, which are actively managed. ETFs can also be traded throughout the day, just like stocks. In 2022, the total assets under management (AUM) of ETFs in India were over Rs 1 trillion. This is a significant increase from the AUM of Rs 200 billion in 2015.

There are several reasons for the growing popularity of ETFs in India. One reason is that ETFs offer a number of benefits such as low fees, liquidity and diversification. Another reason is that ETFs are becoming more accessible to investors. In the past, ETFs were available only to institutional investors. However, now they are available to retail investors through online brokerage platforms. As the popularity of ETFs continues to grow in India, there are a number of trends that we can expect to see. One is that we will see more ETFs being launched. Another trend is that we will see more investors using ETFs to diversify their portfolios.

Passive Management

Passive management lies at the core of ETFs, distinguishing them from actively managed funds. The primary objective of an ETF is to replicate the performance of a specific market index, which gives rise to a style of fund management known as passive management. This approach offers several advantages for investors in index funds. In passive management, the role of the fund manager is to make only minor adjustments periodically to ensure the ETF remains in line with its target index.