Exchange traded fund and the benefit of investing in NIFTY ETF

Exchange traded fund are passive mutual fundschemes which track the price of a market index such as Sensex, Nifty etc. ETF invests in a basket of securities constituting that index.  

Characteristics of an ETF –

  • The weight of each security in an ETF has the same weight as it has in the index. For an example, if a stock has 3% weight in the Nifty Index, the same stock will also have 3% weight in the Nifty ETF.
  • Like any other mutual funds, exchange traded fund are also professionally managed by fund managers.
  • ETFs do not target to beat the index returns unlike actively managed mutual fund schemes. The aim of an ETF is to track and replicate the index returns.
  • To trade inETFinvestors need to have a demat and trading account. This is mandatory as ETF mutual funds are listed on stock exchanges and are traded just like any other shares of listed companies.
  • While actively managed mutual fundschemes which can be bought or sold at the daily NAV declared by the AMC, the market price of an exchange traded fund can be higher or lower than the actual mutual fundNAV.

Benefits on investing in NIFTY ETF –

Nifty ETF usually refers to the exchange-traded funds which follow the Nifty 50 Index. Below are some factors to consider investing in it and the benefits –

  1. Nifty ETF is passively managed mutual fundsthat aim to mirror the performance of the Nifty 50 index. Nifty 50 Index represents the 50 largest companies listed on India’s National Stock Exchange (NSE). If you want to benefit from investing in a diversified portfolio of top 50 blue chip companies of India, a Nifty ETF can provide exposure to that.
  1. NIFTY exchange traded fund offers diversification across various sectors and large industries since it includes a broad range of large-cap stocks. The benefit is that it reduces the risk if you were to invest in individual stocks.
  1. NIFTY ETFis a lower cost mutual fund investment compared to its actively managedpeers, thus it provides the benefit of higher returnin thelong run.
  1. Nifty ETFs are traded on stock exchanges like anylisted individual stocks, therefore, offers intraday liquidity. You can buy and sell NIFTY ETF daily at market prices on stock exchange platforms during the trading hours.
  1. NIFTY ETF can be a very important investment avenue for reaching your investment goals as it is low cost and invest in the best of the best blue chip companiesthus less riskier.
  1. Investing in equities, including Nifty ETF, is generally more suitable for long-term investments simply because it can be volatile in the short term.
  1. For asset allocation purposes, investing in equities is must. And therefore, you may consider investing in NIFTY ETF for asset allocation purposes as it can fulfil the purpose of investing in equities. Needless to mention, to manage risk effectively, your investment portfolio should be diversified across different asset classes like, equities, fixed income, and Gold and other investments.

Before investing in a NIFTY ETF or any other exchange traded fund, it is suggested to consult with a financial advisor or a mutual fund distributor or conduct thorough research to ensure that it aligns with your investment objectives.