If you are seeking investment options in India, one of the options you can consider is mutual fund schemes. In a mutual fund, an AMC, i.e., the asset management company collects money from a group of like-minded investors and pools them into a fund. The pooled money is then used to invest in a wide range of financial securities. Thanks to the different advantages associated with them, mutual funds are considered one of the reliable investment schemes in India.
However, there is one important thing to remember about mutual funds.The thingto remember is that just selecting a mutual fund is not enough, you need to select the right variant. That’s because, in the market, there are numerous types of mutual funds available as an option. One of these different optionsavailable is exchange-traded funds or ETFs.
What are ETFs?
One of the many variants of mutual funds, exchange-traded funds (ETFs) isan example of passive investing. ETFs are known for consisting of a basket of bonds, stocks or even commodities that are known for tracking an index on the exchange. Simply put, an ETF can consist of stocks that reflect the arrangement of stocks in the SENSEX or NIFTY indices.Furthermore, ETFs can also be purchased and sold throughout any given trading day based on the NAV, i.e., the net asset value that’s disclosed on that day, making them similar to any stock. These mutual funds can be considered a viable option by investors with a moderately high-risk appetite seeking a long-term investment horizon.
Are there any strategies that one can follow for ETF investments?
Listed below are some of the different strategies you can use to invest in this passively managed variant of mutual funds:
- Organized strategy:
Generally, investors are known for having an organised approach to fund allocation when it comes to mutual fund investments. Something similar isapplicableeven for investing in ETFs, where you may opt to start early, choose an ETF scheme that suits your investment requirements, invest regularly, and even determinethe time you wish to stay invested for in these funds. You can choose to organise your approach based on what you wish to have in your portfolios such as a diversified exposure to markets, sectors, or countries.
- Systematic strategy:
You can opt to invest in ETFs with the help of a systematic investment plan or SIP. For this, firstly, youneed to have a Demat account. With its help,you can start a SIP in the ETF of your choice. Under SIP, an already fixed amount is invested at regular intervals of time for a specific duration until you achieve your investment objectives. Apart frominculcating financial discipline,following this strategy might help you achieve your future financial goals.
- Timehorizon strategy:
Another strategy you can opt for is opting to invest in ETFs after determining your time horizon. For example, in case you have a long-term financial goal, you can choose an ETF scheme, that can help you acquire capital appreciation over the long term.
- Core and Satellite asset allocation strategy:
By the name,in these plans, there’s a core or foundation asset category which is regarded as the most significant component of the overall portfolio. For example, broad market ETFs such as NIFTY50, Next50, and Mid-cap 150 can serveas the foundation of equity allocation. The satellite component would preferably form a small percentage of the total allocation. It can be used to generate a return higher than the market. Smart beta index ETFs are known formaking use of various factors such as low volatility, momentum, value, and Jensen’s alpha, to generate ‘alpha’ over the core beta indices.
Apart from the strategies mentioned above, you can also choose to make investment decisions after researching the index an ETF is benchmarked to. However, you need to makenote of the fact that ETFs attempt to imitate the performance of the index they are tracking. So, before choosing an ETF, it will be prudent on your part to seek the counsel of a financial advisor.