As you look for new ways to grow your wealth, consider exchange-traded funds (ETFs). They’re a popular investment choice for those who want to achieve this goal. That’s because they’re great for beginners and experienced investors alike who want to diversify their portfolios.
So, what are ETFs? An ETF is a basket of securities that trades like stocks on exchanges. Unlike the stock market, investors don’t buy shares in one specific company. Investing in an ETF instead spreads your money across different investments within the category.
Let’s explore the benefits of ETFs, the types of ETFs, and some of the top ETF options for Indian investors.
How Do Exchange-Traded Funds Work?
When you invest in an ETF, you’re investing in a basket of securities. As Investopedia puts it, an ETF “is a type of pooled investment security that operates much like a mutual fund.” ETFs track an index, commodity, or sector, and unlike mutual funds, they can be purchased and sold just like a regular stock.
Since ETFs work in a similar way as stocks, their share prices can change throughout the day. Mutual funds, on the other hand, can only trade once per day after the close of the market. Unlike investing in an individual stock, an ETF spreads your investment across multiple underlying assets in the category.
The Benefits of Investing in ETFs
Exchange-traded funds offer several advantages to investors. For example, ETFs:
- Instantly diversify your portfolio. With a single purchase, you can gain exposure to a variety of assets and make your portfolio less risky.
- Offer a variety of options depending on your investment goals. Whether you want to invest in stocks, gold, bonds, or currencies, there is likely an ETF.
- Are baskets of securities that trade like stocks on exchanges, meaning they can be bought and sold quickly and easily.
- Typically have lower fees than other types of investment funds, like mutual funds. This can help you save money in the long run.
Types of ETFs
There are several types of ETFs to consider, including index ETFs, gold ETFs, and sector ETFs. Index ETFs, for example, track the performance of a specific index, like the Nifty 50 or S&P 500. Gold ETFs track the price of gold, while sector ETFs invest in stocks from a specific sector, like technology or healthcare.
Other types of ETFs include bond ETFs, currency ETFs, sustainable ETFs, and property ETFs. Bond ETFs are similar to bond mutual funds, except they’re passively managed like other ETFs. Currency ETFs invest in foreign currencies, sustainable ETFs track companies committed to sustainable practices, and property ETFs invest in real estate securities.
Each type of ETF has its own unique benefits and risks that investors should be aware of before making a decision. For example, index ETFs offer broad diversification, while gold ETFs can provide a hedge against inflation. Overall, ETFs offer investors a wide variety of options for growing their wealth.
Top ETFs for Indian Investors
ETFs are an opportunity for investors to gain exposure to an asset class without needing to spend time researching individual assets. ETFs are also a great way for Indians to invest abroad. For example, the Motilal Oswal Nasdaq-100 ETF offers investors exposure to the performance of the Nasdaq 100 Index. The Nasdaq includes some of the largest and most well-known companies in the world.
Here are some of the top ETFs to keep in mind.
- The Motilal Oswal Nasdaq-100 ETF is popular with Indian investors. It tracks the performance of the NASDAQ-100 Index, which is made up of the 100 largest stocks listed on the NASDAQ stock exchange. According to Motilal Oswal Financial Services, the minimum investment required is ₹10,000.
- The Birla Sun Life Gold ETF is another option for Indian investors. It invests in physical gold of 99.5% purity, according to Aditya Birla Capital. The Birla Sun Life Gold ETF is interesting because it offers investors a way to gain exposure to the price movements of gold without having to actually own physical gold.
- The Vanguard Australian Shares Index ETF is another popular option for Indian investors. It tracks the performance of the S&P/ASX 300 Index, which consists of the 300 largest companies listed on the Australian Securities Exchange. Vanguard says investors can open an account with them for as little as U.S. $200.
- If you’re looking for exposure to India’s growing infrastructure sector, then consider investing in the Nippon ETF Infra BeES. It invests in a diversified mix of stocks from the infrastructure sector. According to Nippon India Mutual Fund, the Nippon ETF Infra BeES “employs a passive investment approach designed to track the performance of Nifty Infrastructure TRI.”
- The Kotak NV 20 ETF is a popular investment choice for Indians because it’s considered a relatively stable index of domestic stocks. The Kotak NV 20 ETF is made up of 20 stocks, including Reliance Industries, HDFC Bank, and ICICI Bank. According to Groww, Kotak NV 20 ETF has an average annual return of “3.39% since its inception.”
- The Market Vectors Indian Rupee/USD ETN is a popular currency ETF for Indian investors who want to diversify. This ETF tracks the price of the Indian rupee relative to the U.S. dollar. However, “it’s important to be aware of the relatively volatile nature of foreign currency markets compared to the top flight indexes,” according to Nation.com.
- The UTI S&P BSE Sensex ETF is an exchange-traded fund that invests in stocks of the 30 most prominent companies listed on the Bombay Stock Exchange. It is one of the most popular ETFs in India, and according to Groww, it has provided five-year returns of 14.5% as of November 2022.
Of course, these are just some of the top ETFs for Indian investors. As you research your options, a few other ETFs to have on your radar include the Nippon ETF Long-term Gilt, LIC G-Sec LTE Fund, Axis Gold ETF, and LIC MF Flexi-Cap Fund.
Diversifying Your Portfolio With ETFs
When you invest in an ETF, you invest in a basket of securities that represent a particular index, sector, or another type of asset. This can be a great way to spread your risk and protect your portfolio against sharp declines in any one security, local recessions, and global economic downturns.
Additionally, investing in different types of ETFs creates a diversified portfolio that gives you exposure to a variety of asset classes and markets around the world. As a result, ETFs can help investors grow their wealth over the long term. That makes ETFs an attractive investment worth exploring.