What are ETFs?

Different types of ETFs: Exchange-Traded Fund or ETFs are passive mutual funds that aim to track the performance of a market index like NIFTY or Sensex, etc. Unlike actively managed mutual fund schemes, ETFs do not aim to beat the market benchmark index. ETFs also track the price of commodities like Gold, Silver, etc.

ETFs are listed in stock exchanges and trade in exchanges just like shares of listed companies, commodities, etc. You need to have Demat and trading accounts with a stockbroker to invest in ETFs. You can buy or sell ETFs on the stock exchange during market hours at prevailing market prices. 

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Different types of ETFs in India

Most investors associate exchange-traded funds with indices like Sensex, Nifty, Bank Nifty, etc. You can get exposure to various asset classes, e.g. domestic equity, international equity, gold, fixed income, etc through ETFs. Within an asset class, you can diversify further by investing in ETFs of different market segments (large-cap, midcap, liquid fund, G-Sec, PSU corporate bonds, etc), industry sectors (private sector banks, PSU banks, consumption, IT, etc).

• Index ETFs: These ETFs invest in different equity market indexes e.g. Sensex, Nifty 50, Nifty Next 50, Nifty 100, Nifty Midcap 150, etc. 
• Gold ETFs: These ETFs represent the INR value of pure 24-carat physical gold. Each unit of a Gold ETF represents 1 gram of physical gold. 
• Fixed Income ETFs: These ETFs invest in various fixed income asset classes / sub-classes like money market, G-Secs, PSU bonds, etc. They replicate fixed income indices like Nifty 1D TRI, Nifty 8 – 13 year G-Sec index, NIFTY Bharat Bond Index Series, etc.
• Sector ETFs: These ETFs provide exposure to different industry sectors like banking, consumption, infrastructure, PSU, etc. Indices like Bank Nifty, Nifty Private Bank, Nifty PSU Bank, Nifty India Consumption, Nifty CPSE, Nifty Infrastructure, etc provide exposure to different industry sectors. 
• Strategy Index ETFs: These ETFs invest in strategies like Value, Quality, Dividend Opportunities, ESG, etc. Indices like Nifty 50 Value 20, Nifty 100 Low Volatility 30, Nifty Dividend Opportunities 50, NIFTY Midcap150 Quality 50, Nifty 100 ESG Sector Leaders, etc provide exposure to different strategies.
• International ETFs: These ETFs invest in international indexes like NASDAQ 100, Hang Seng, etc. 

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Build a diversified portfolio with ETFs

The ETF category of mutual fund investment in India has evolved tremendously over the last few years. It is possible to build a diversified portfolio comprising only ETFs. 

• Asset allocation is the most important characteristic of a diversified portfolio. You can get cost-efficient exposures to alternative asset classes like gold, international equity, etc through ETFs. 
• ETF enables you to get true diversification because you invest in the entire universe (basket of securities) of particular asset classes / sub-classes. 
• Sector investments may be more efficient with ETFs compared to actively managed mutual fund schemes.

You should discuss your investment needs, portfolio construction, and how to achieve your investment needs if you invest in ETF, with a financial advisor.

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