Brief Summary
This video explains what Exchange Traded Funds (ETFs) are, how they function, and how they compare to mutual funds. It covers the key differences between ETFs and mutual funds, including expense ratios, minimum investments, trading flexibility, and tax implications. The video also provides guidance on how to select ETFs, emphasizing the importance of considering market risks and liquidity.
- ETFs are traded directly on exchanges like stocks.
- ETFs have lower expense ratios compared to mutual funds.
- Liquidity and volume are important factors to consider when selecting an ETF.
What are ETF ?
Exchange Traded Funds (ETFs) function similarly to open-ended funds or mutual funds but are traded directly on exchanges like stocks. ETFs have an underlying asset class, such as stocks, currencies, bonds, or commodities like gold and silver. While mutual funds are based on different asset classes as well, they are not traded directly on exchanges. ETFs combine features of both stocks and mutual funds, offering a portfolio or underlying asset class similar to mutual funds, but with the trading flexibility of stocks, including delivery and intraday trading.
ETF VS Mutual Funds
ETFs move live with market volatility, similar to the Nifty 50, whereas mutual funds move based on the closing price of the day. ETFs can be bought at the price shown live on the market, while mutual fund units are allocated based on the closing price. Just as there are mutual funds based on large caps, mid caps, small caps, and sectors, there are also ETFs for various asset classes, including gold, silver, currencies, and bonds. Comparing a gold fund and a gold ETF, their performance is almost the same, but there can be slight differences in returns over a year due to tracking errors and expense ratios.
Key Differences
ETFs generally have lower expense ratios compared to index funds, making them a better option for those concerned about cost. The minimum investment for index funds starts at ₹500, while ETFs require purchasing at the stock price, which can be above or below ₹500. ETFs offer trading flexibility with intraday, momentum, and swing trade options, unlike mutual funds. Short-term capital gains (within one year) are taxed at 20%, and long-term gains (after one year) at 12.5% for both ETFs and mutual funds. ETFs are suitable for both short-term and long-term investments, while mutual funds are more suitable for long-term investments.
How to pick ETF's ?
ETFs, being market-linked products, come with market risk, so it's important to do thorough research or consult a financial advisor before investing. Liquidity is another risk to consider, as some ETFs have very low liquidity. When selecting an ETF, check its Assets Under Administration (AUA) and volumes to ensure buy and sell transactions can be executed in a timely manner. Purchasing an ETF is similar to purchasing stocks, requiring a demat account and funds in a wallet.
