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Index ETF : Good way to participate in the market

The Exchange traded funds are increasingly catching investors attention and acceptance. Exchange traded funds also known as ETFs have gained wider acceptance as financial instruments whose unique advantages over mutual funds have caught the eye of many savvy investors. For investors who believe in passive investments rather than active investments, index ETFs present an excellent opportunity to invest efficiently. Passive investing is investing style where one wants to mimic index returns and does not want to take active risk in markets.

What is an ETF ?

To start with Exchange Traded Fund (ETF) is like a mutual fund that tracks an Index, a commodity or a basket of assets. The difference lies in the manner in which it trades. An ETF trades on bourses just like stocks. An investor can buy and sell shares in ETF throughout the day like stocks on a stock exchange through a broker –dealer , which is not possible in the case of mutual fund investing. The share prices of ETF are market determined but are close to the Net Asset Value (NAV).In case of mutual funds , investors buy and sell at the Net Asset Value (NAV).

There are three different kinds of ETFs  Index ETF , Commodity ETF & Liquid ETF

Index ETF is for those passive investors who want to mimic Nifty or Sensex returns. An index ETF is based on an index such as NIFTY or Sensex. These ETFs allow investors to invest money in a basket of stocks in an index at a very small amount, usually one tenth of the index value. For example one unit of Sensex ETF can be available at 3000 (1/10th of 30000) assuming Sensex is trading at 30000.

Advantages of ETF investing is “ by buying a single unit of Nifty or Sensex ETF an investor gets an exposure to the topmost 50 companies (Nifty ) or Topmost 30 companies (Sensex) at one tenth of the price.” Thus each unit allows you to invest your money into a well diversified portfolio mimicking index of either 50 companies if one chooses Nifty or 30 companies if one chooses Sensex. One can simply buy an ETF by placing an order through the broker dealer or can buy online.

When compared to Mutual funds ETF will be available at lesser expense ratio. Another advantage of investing in an ETF is that there is less churning of portfolio happening. Savvy investors can look at ETF root for index investing due to its inherent advantages. 

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