Exchange Traded Funds (ETF's) – Are these the best investment options?
What is an exchange traded fund (ETF fund)?
Exchange traded funds are basket of stocks which reflects an index, but trades like a stock in stock exchanges. The basket of stocks can be index stocks across various countries, commodities etc. The value of the ETF changes during the day as and when the underlying assets value changes.
ETF Vs Mutual fund
Investors get confused about ETF Vs Mutual funds. ETF’s are similar to mutual fund. However the difference is, the mutual funds NAV value is computed only at the end of the day and can be purchased with the closing value of the day based on the stocks invested. However ETF’s can be purchased through stock exchanges during the day based on the values which get updated with the change in the value of the stocks. These stocks are just replica of a group of assets under a class (Index, banking etc.)
What are the various ETF’s?
Currently there are various ETF’s available either in Index stocks, Banking stocks, Commodities etc.
Index ETF’s : These Exchange traded funds invest in composite basket of index funds. The value of the ETF is directly determined with the increase / decrease of index in the day. An investor, who wants to invest in all index stocks, may face problem by purchasing and tracking individually. Such investor can invest in these Index ETF’s. The index fund motive is to outperform the index; however Index ETF’s will simply replicate the underlying assets performance.
Gold ETF’s: These Exchange traded funds invest directly in Gold. The gold ETF’s are available in the units of 1 Gram Gold i.e. when you want to buy such Gold ETF, it is similar like you are buying 1 gram of gold. You can buy multiple units thereafter. The value of the gold determines the value of the Gold ETF. This is one of the best ways of investing in gold without having physical gold.
Banking ETF’s: These Exchange traded funds invest in composite basket of banking stocks. The value of the ETF is directly determined with the increase / decrease of banking stocks during the day. The banking index fund motive is to outperform the banking index; however Banking ETF’s will simply replicate the underlying bank stocks.
Other ETF’s: There are various other Exchange traded funds who invest in composition of other countries index or NIFTY Junior stocks, Infrastructure stocks etc.
Best Exchange traded funds (best ETF funds) based on the returns:
| Type of ETF | Scheme Name |
NAV (Rs) Crores |
1 yr returns % | Overall performance returns % p.a. |
|---|---|---|---|---|
| index | ICICI Prudential Sensex Exchange Traded Fund | 203.63 | 12.93 | 24.58 |
| index | Quantum Index Fund-Growth | 585.3 | 12.06 | 24.4 |
| index | Kotak Nifty ETF-Dividend | 584.26 | 12.05 | 24.44 |
| Gold | SBI Gold ETS | 3126.05 | 12.65 | 16.65 |
| Gold | Religare Gold Exchange Traded Fund | 3149.76 | 12.58 | 16.58 |
| Gold | Kotak Gold Exchange Traded Fund | 3065.39 | 12.57 | 16.64 |
| Banking | RelianceShares Banking Exchange Traded Fund-Dividend | 1190.91 | 15.74 | 43.47 |
| Banking | Goldman Sachs Banking Index Exchange Traded Scheme | 1156.06 | 14.85 | 43.24 |
| Others | Motilal Oswal MOSt Shares NASDAQ-100 Exchange Traded Fund-Growth | 154.84 | 40.5 | 27.62 |
| Others | Goldman Sachs Hang Seng BeES – Growth | 1525.57 | 25.35 | 16.06 |
Conclusion: Exchange traded funds invest in composition of stocks. Hence if you want to benefit out of group or class of assets where you do not want to track the stocks individually, you can buy best ETF funds. However you should note that these ETF’s are just replica of underlying stocks of particular class like index. If the class of stocks underperforms, (like Indian SENSEX which was hovering at 17-18K points in the last 2 years) you would not get benefitted. These ETF’s are good, provided you see a good growth in the particular class of assets. As an example, we are expecting that gold prices would increase in future. On such cases, investing in Gold ETF’s would be a best bet. An investor should analyze the class of assets which are expected to grow and invest in corresponding ETF’s which invest in such assets.
Readers, what is your opinion about exchange traded funds (ETF’s)? Please give your comments
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Happy investing in Best ETF funds.
Suresh
Myinvestmentideas.com
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Hi Suresh,
I am a beginner into stock market. To start with, I feel ETF is the best bet.
But then I am confused if I need to have Trading and Demat account for all ETF's. If my understanding is correct both are required. http://www.jagoinvestor.com/2009/09/understanding-demat-and-trading-account.html
Do you have any articles explaining about these accounts and recommendations for Demat and Trading account ?
Hi Krishna, Demat account is where your dematerialised stocks are kept in electronic form. Trading account is to transact (buy and sell) in the stock market. Both are required if you want to do trading and buy and sell stocks. I have not written about this yet. If you want you can post a request on suggest a topic, i would analyse them in coming weeks.
Apprecaite your prompt response.
I will put a request now. Also are there any senior citizen benefits in this as well ?
Thanks,
Krishna
No Krishna.