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Namaskar, and welcome to Coverfox! Are you looking for good investment options under mutual funds? Do you want to diversify your portfolio so that you can minimize risk and expect better returns? Well, there exists a tool for every type of investor - and on this page, we cover the Exchange Traded Fund. Get all the information you need about ETFs in this article - definition, features, benefits, drawbacks, and even their types - all of which will aid your decision making. Don’t waste time! Secure your family’s financial future using our platform for hassle-free investment.
When it comes to investment tools, it’s always essential to pick the right choice that fits your purpose. Do you want to go for aggressive-wealth creation? Do you want to select the right option to ensure good savings for future needs? ETFs are an investment vehicle that comes under the mutual fund banner. But that’s as much similarity there is between the two options. Some important points about the ETF are Below:
ETFs come under the mutual fund category and are traded on a stock exchange. Their workings are similar to stock investments.
ETFs resemble a basket of assets or stocks and behave like the owner of assets underlying the fund. These assets include but are not restricted to companies’ stocks, foreign currency, gold, oil futures, and bonds.
Since these funds can be purchased and sold on stock markets, similar to company shares, they resemble mutual funds. In India, index-linked and gold ETFs are the most common forms of this fund.
ETFs divide the assets it owns into smaller units, referred to as shares, purchased, and sold on the exchange. The market value of net assets determines the current trading value of an ETF that the fund consists of at a particular time.
For instance, in the case of a gold ETF, which majorly comprises gold bullion as the underlying asset, fluctuations in gold prices immediately affect gold ETF’s price. Simple enough? Wait, there’s more!
Contrary to company shares, shareholders of ETFs cannot stake claim to that fund’s underlying assets. However, these shareholders are eligible for profits earned from the underlying investments in terms of interests and dividends.
IMPORTANT: The shareholders may also be able to avail of residual value in the liquidation of the ETFs.
Different types of ETFs serve a wide variety of investor needs. Always pick the right choice to suit your investment needs. Choosing investment types is never easy. Let Coverfox make your task simpler. Here are the types of ETFs on which you should focus your investment strategy.
Index ETF: The most popular ETF, these funds are passively managed and replicate an index’s performance. To do so, it buys every stock available in the benchmark index in equal proportions.
Stock ETF: This ETF offers investors exposure to multiple equities in a specific index or sector without buying individual stocks.
Bond ETF: This ETF aims to replicate the returns of an index of bonds. Bond ETFs have monthly income pay-outs, are diversified, and have high liquidity.
Commodity ETF: This ETF invests in commodities like gold, silver, and other precious metal. They administer Future Trading.
Currency ETF: This ETF helps investors trade foreign currencies in a streamlined manner during trading hours, after tracking them in the foreign exchange market. It is reasonably priced.
Actively Managed ETF: In this ETF, a fund manager drives decisions regarding the portfolio of the underlying assets.
Inverse ETF: Also referred to as a Bear ETF or Short ETF. The returns perform inversely to their benchmark index portfolio based on trading derivatives, short selling, etc.
Leveraged ETF: These are highly risky ETFs. They use debts and financial derivatives to enhance the returns on the underlying index.
Investors face multiple dilemmas - “Should I invest in this investment option or not? When should I invest? How much should I invest? Will I be able to fulfill my investment goals with this choice of investment?” and many more! The list is never-ending.
Let us clear the mist in front of you and highlight the advantages of this investment tool -
“Do ETFs solve our basic investment goals?” This one will be the question on many investors’ minds. Our answer - YES! Some of the many benefits that make this fund an ideal choice are as follows:
ETFs look to get your best returns at the lowest investment.
As with every investment fund, drawbacks follow the advantages. Let’s analyze the possible disadvantages of ETFs - \
ETFs are the best choice for passive investors, who don’t have the time or means to check their portfolio daily. They are also a preferred investment choice for investors like you and me - low investment with high returns - a golden combination.
Are Gold ETFs a good investment?
Let’s have a detailed look at the benefits of gold exchange traded fund investments.
Healthy return on investment: The value of gold rarely depreciates. As gold mutual fund investments are linked to the market value of gold, they offer positive returns on investment, unlike other asset classes.
Gold asset class is closely related to other asset classes like bonds and equity and remains unaffected during unstable economic situations like in inflation.
The ability of gold to resist unstable capital market situations, along with appreciating value, makes gold mutual funds one of the safest investment instruments.
Being a secure investment option, gold mutual fund give investors an opportunity to invest in a wider range of low-risk shares and stocks of gold manufacturers and miners to rebalance their portfolio. Demat account not compulsory: Gold mutual fund schemes offer exposure into gold as an asset class, even with a nominal investment amount, without having a demat account to invest through a mutual fund provider.
It encourages a disciplined investment approach over the long-term and ensures systematic investments in gold. It enables investors to plan the monthly expenses as per their investment and without ‘timing the markets’.
Gold mutual funds offer investors the benefit of redeeming gold funds on all business days, offering necessary financial support during emergency situations.
Gold mutual fund enables investing small amounts, as per the convenience of investors. What makes it even more reasonable is that it does not involve extraneous expenses that are usually involved in other types of investments like annual maintenance charges for demat account , brokerage or delivery fees or transaction fees incurred for investing through the dematerialised mode, etc.
Gold mutual funds enable investors to avail long-term capital gains tax after remaining invested for a year. This is because it is treated as a non-equity investment from the tax perspective. In contrast, physical gold long-term taxation can be claimed only after 3 years since the investment.
Most gold mutual fund providers are equipped with service centres across locations in India to ensure easy accessibility and instant assistance.
Add-on features like systematic transfer plan and systematic withdrawal plan are also offered on gold mutual funds.
Which one is better ETF or mutual fund?
The following will help you understand how exchange traded fund investments score over mutual fund investments:
What is gold ETF scheme?
Gold Exchange Traded Fund (ETF), invests majorly in physical gold bullion . In other words, their underlying asset is physical gold bullion. Whereas a gold mutual fund invests in Gold ETFs which in turn invest in the bullion, the cost of the shares in these funds usually keeps up with the existing market price of gold.
Gold mutual fund is emerging as one of the leading mutual fund investment options. A distinctly unique feature that separates it from the other popular mutual fund categories is that while most mutual funds invest in stocks and other securities, gold mutual funds indirectly invest in physical gold assets.
Gold Mutual Funds in India are traded on the National Stock Exchange (NSE) and other globally renowned exchanges and function in a similar fashion as equity stocks of companies. This enables the units of gold mutual funds to be consistently sold and purchased on several international stock exchanges at the quoted market prices. The value of these mutual fund investments is closely linked to gold prices in the local or global markets.
This is a passive investment option that is best suited for individuals as well as companies that does not find purchasing physical gold a viable proposition or want to diversify their portfolio. Besides, it offers exposure to gold asset class, without the hassle of registering for a demat account. It is a safe investment instrument that remains mostly stable even during market volatility because gold prices seldom depreciate.
How do gold ETF work?
The objective of gold mutual fund is to replicate the performance of gold. Fund houses offering gold mutual funds manage their funds with the same aim. Authorised Participants (AP) are appointed by fund houses offering these mutual funds to purchase the units of these funds in lieu of physical gold assets. These participants are then involved in secondary market trading of gold. The underlying gold is controlled and managed by the fund house in the form of gold receipts or physical gold, giving it the ownership right.
The authorised participants can later decide to redeem the mutual fund units in exchange of the existing gold price. Gold mutual fund units can be purchased through a stock exchange that enables investors to purchase and sell gold units on a certain rate of payment as mentioned in the investment document. These authorised participants are usually leading financial institutions like market makers that are authorised with obtaining the underlying assets required to create, manage and run gold mutual funds.
Purchasing and selling of gold mutual fund units on the stock exchange does not create new units. New units can only be directly created with the fund house on the authorised participants appointed by the fund house in exchange of the underlying security with the gold mutual funds. The creation of new units leads to a rise in demand of physical gold.
The investment process for gold mutual funds is the same as that of stocks. As a result, they too experience price fluctuations during a trading day due to supply and demand. When several investors purchase gold mutual funds, their share price might rise above the NAV. Similarly, when many investors sell their gold mutual fund, the share price might experience a fall below its underlying bullion.
Gold mutual fund investments are greatly driven by the sentiment and psychology of investors. This is because they are bearish to lower prices and bullish to rising prices. Rising gold prices create great enthusiasm among gold mutual fund investors to purchase shares, which leads to a rapid increase in gold mutual fund share prices. Similarly, falling gold prices throw investors in a panic mode, making them sell their shares, which brings down gold mutual fund share prices.
The authorised participants purchase physical gold and deliver it to the gold mutual fund company in lieu of a block of gold mutual fund shares, referred to as a creation unit. The authorised participant may resell these shares for profits or redeem creation units to obtain the bullion, which again can be sold. Only authorised participants can redeem gold mutual fund shares, while retail investors can resell them in the open market. Whether it be securing, selling or reselling shares of gold mutual funds, share prices are determined by the actions and decisions of these authorised participants.
Are gold ETFS backed by physical gold?
Yes, certain Gold Exchange Traded Funds (ETFs) are backed by physical gold. However, contrary to popular belief, even if you have invested in physically-backed gold ETFs, it does not mean that you own physical gold. You cannot sell or redeem shares in lieu of physical gold.
What is ETF in stock market?
Exchange Traded Funds (ETF) are classified under the mutual fund category and traded on a stock exchange. Exchange traded fund investments work similar to stock investments. Resultantly, its Net Asset Value (NAV) is not calculated at the end of each trading day as it is for mutual fund investments. This is because Exchange Traded Funds witness fluctuations in their prices throughout their purchase and sale. The underlying assets held by an exchange traded fund can be stocks, bonds, commodities, foreign currency, oil futures, etc.
The ownership of these underlying exchange traded fund assets is segregated by converting them into shares. Though these assets cannot be owned by shareholders, they can avail a specific percentage of the profits as interests or dividends. Similar to stocks, exchange traded fund units can be bought, sold and transferred.
Exchange traded funds closely assess the indexes like bond index or stock index like CNX Nifty or BSE Sensex. However, in contrast to other index funds, exchange traded funds do not make an effort to improve their performance in comparison to other corresponding index. They aim to replicate the performance of the corresponding index. Exchange traded funds are a wise investment option for investors as they offer high liquidity at low prices.
Are ETFs a good investment?
Here are benefits that investors of exchange traded funds can make the most of:
Allows investors to take advantage of the prevalent price, exchange traded funds ensure purchases on the stock exchange and the ease of making intra-day sales at the existing price.
Exchange traded funds are an effective investment instrument that help investors receive lucrative trading options by offering funds that track the performance of an index closely during the trading day. These funds can be purchased or sold as per the convenience of the investor.
Exchange traded fund investments are aligned to allow authorised participants and large institutions generate new units and also exchange the remaining units with the fund, as opposed to listed close-ended funds that generally trade at discounts to NAV. This helps in ensuring that exchange traded funds can be traded at their original NAV as much as possible.
The exchange traded fund performance resembles that of index funds. The subscription and redemption of units functions with underlying securities and not with cash.
Exchange traded funds ensure a considerably higher reach and that too at lower costs. As these funds are listed on the stock exchange, the savings made on the distribution charges get shared with the investors through lower price quotes. The structure of exchange traded funds further brings down processing charges involved in collection, disbursement, etc.
Since exchange traded funds closely tracks transaction charges included at the time of purchase, subscription and redemption of index shares, long-term investors are saved from unnecessary inflows and outflows that are experienced by short-term investors.
Exchange traded funds serve as an efficient and flexible investment instrument for gaining immediate exposure to equity markets.
How does an ETF work?
Exchange traded funds resemble a basket of assets or stocks and behave like the owner of assets underlying the fund. These assets include but are not restricted to stocks of companies, foreign currency, gold, oil futures and bonds. Since these funds can be purchased and sold on stock markets, similar to company shares, they resemble mutual funds in this regard. In India, index-linked and gold exchange traded funds are the most common classification under this investment category.
Exchange traded funds divide the assets it owns into smaller units, referred to as shares, which can be purchased and sold on the exchange. The existing trading value of an exchange traded fund is determined by the applicable value of net assets that the fund consists of at a particular point of time. For instance, in the case of a gold exchange traded fund, which majorly comprises of gold bullion as the underlying asset, fluctuations in gold prices immediately affects the price of gold exchange traded fund.
However, contrary to company shares, shareholders of an exchange traded fund cannot stake claim to the underlying assets of that fund. However, these shareholders are eligible for profits earned from the underlying assets in terms of interests and dividends. The shareholders may also be able to avail a residual value in case of the liquidation of exchange traded funds.
What is an example of an ETF?
Some examples of exchange traded fund are:
What is an ETF and how does it work?
Exchange Traded Funds (ETF) are classified under the mutual fund category and traded in a stock exchange. Exchange traded fund investments work similar to stock investments. Resultantly, its Net Asset Value (NAV) is not calculated at the end of each trading day as it is for mutual fund investments. This is because Exchange Traded Funds witness fluctuations in their prices throughout their purchase and sale. The underlying assets held by an exchange traded fund can be stocks, bonds, commodities, foreign currency, oil futures, etc.
What is the difference between mutual funds and exchange traded funds?
The following are differences between exchange traded fund investments and mutual fund investments: