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Puneinvest > Blog > Mutual Fund > Exchange Traded Funds: The Advantages and Disadvantages (ETFs)
Mutual Fund

Exchange Traded Funds: The Advantages and Disadvantages (ETFs)

Exchange Traded Funds (ETFs) are investment vehicles that allow investors to buy shares in a fund that holds a basket of assets, such as stocks, bonds

Last updated: 2023/02/07 at 6:11 PM
Rajendra Todkar Published January 2, 2023
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Exchange Traded Funds (ETFs) are investment vehicles that allow investors to buy shares in a fund that holds a basket of assets, such as stocks, bonds, or commodities. ETFs are traded on stock exchanges, similar to stocks, & their prices fluctuate throughout the day based on supply and demand.

Contents
Basic ConceptIs ETF is good Investment?Best ETF in IndiaETF vs Stock – what is difference?Difference between ETF vs Index FundAdvantage of ETFDisadvantage of ETF

Basic Concept

  1. ETFs are a type of passive investment, which means they aim to track the performance of a specific index or benchmark, such as the Nifty 50, Sensex or Nifty 100 equal weight index.
  2. ETFs are created & managed by fund house, who are responsible for buying and holding the underlying assets in the fund and ensuring that the ETF tracks the performance of the index or benchmark.
  3. ETFs can be composed of various types of assets, such as stocks, bonds, commodities, or real estate.
  4. ETFs can be purchased and sold on a stock exchange throughout the trading day, just like stocks.
  5. ETFs typically have lower expense ratios than passively managed funds.

Is ETF is good Investment?

ETFs can be a good investment for some investors, but they may not be suitable for everyone.

It’s important to consider your investment goals, risk tolerance, & overall financial situation before deciding if ETFs are a good fit for you. ETFs may also have higher trading costs and lack of control over specific securities held in the fund.

Best ETF in India

ETF vs Stock – what is difference?

It’s important to note that ETFs and stocks can both be good investment options, but they have different characteristics

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ETFs and stocks are both types of investments, but they have some key differences.

ETFStock
CompositionETF is a type of investment fund that holds a basket of assets, such as stocks, bonds, or commodities. A stock, on the other hand, represents ownership in an individual company.
TradingETFs can be bought and sold throughout the day on stock exchanges, just like stocks.Stocks also can be traded through the day.
DiversificationETFs can provide diversification by giving investors exposure to a wide range of assets or market segmentsInvesting in individual stocks, however, exposes an investor to the risk of a single company’s performance.
ManagementETFs are typically passively managed, meaning they aim to track the performance of a specific index or benchmark. Stocks, are not actively managed and their performance depends on the performance of the underlying company.

Difference between ETF vs Index Fund

ETFIndex Fund
How they Manage?The majority of ETFs are passive investments that track the performance of a specific index.Index Funds also passive investments that track the performance of a specific index.
Costlow expense ratio, but higher trading costMarginally Higher than ETF
Trading Stylerequired Demat Account – Buy or Sold at market priceNo required Demat – You can Buy or Sold only at price published at the end of each day.
Minimum Investment AmountYou can Buy for the price of 1 Unit/shareas per Fund Scheme Min Application amount
LiquiditySell @market rate. Low volume facing Buy/Sell problem. Fund House – Repurchase and sold at the end of the trading day Price
SIPEvery month you Buy ETF Unit from your Demat Trading AccountFund house provide this facility

Advantage of ETF

ETFs have several advantages over other types of investments.

Some of the main advantages of ETFs include:

  1. Low costs: ETFs often have lower expense ratios than actively managed funds, which can help to increase returns over time.
  2. Flexibility: ETFs can be bought & sold throughout the day on stock exchanges, allowing investors to quickly respond to changing market conditions.
  3. Transparency: ETFs are required to disclose their holdings on a daily basis, which can give investors a better understanding of the underlying assets in the fund.

Disadvantage of ETF

In addition to the advantages, ETFs also have some disadvantages that investors should be aware of:

  1. Trading costs: ETFs can be more expensive to trade than index funds due to bid-ask spreads, which is the difference between the highest price a buyer is willing to pay for an ETF and the lowest price a seller is willing to accept.
  2. Tracking error: ETFs may not always perfectly track the performance of the underlying index or benchmark, which can result in a tracking error.
  3. Risk of market manipulation: ETFs can be sensitive to market manipulation, as they are traded on stock exchanges and can be affected by short-term price fluctuations.
  4. Limited to passive management: ETFs are typically passively managed, which means that they aim to track the performance of index or benchmark & do not attempt to outperform it through security selection or market timing. This may not be suitable for investors who are looking for active management.
  5. Illiquid market conditions: Some ETFs, particularly those with lower trading volumes, may have difficulty finding buyers or sellers in certain market conditions, which can make them less liquid.

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