ETF vs Index Mutual Fund in India

There are always questions in our mind that few days ago in one day the market went up by 4% But my portfolio only grew by 1 or 2%. Then the market went down by 2%. And my portfolio went down by 4-5%. Some more questions like Why does it always happen when we try to make more money and build a good portfolio, but can't beat the market. What do we do in this case? How can we stay in the market and make good money without taking a lot of risks? So below is the answer of your questions:

Today we are going to talk about Index. I am going to tell you something interesting related to Index in which if you invest, the more the market changes you get more profits.

Mutual Fund in India

What is Index? How do we decide which shares go into Index?

You must have heard of NIFTY 50 and Sensex 30. I will tell you the basics about the index. Imagine that you went to a shop to buy some cookies. And you were confused about which cookie to buy there is risk in buying a full box of cookies and if you don't like it that it will go waste. In that case, the solution is that we buy a box filled with several types of cookies. What is the benefit of that? We get more variety and there is less risk of it going waste. The index is such that in an index, we put small shares from several sectors and make a portfolio which is called the market index.

Example of Index:

NIFTY 50 Index: NIFTY 50 has 50 shares taken from different sectors. These shares could be called the best of those sectors.

Sensex 30 Index: Sensex has 30 shares from a variety of sectors. These shares could be called the best of those sectors.

You must be thinking that Index is a very good place to invest in. I will come back to my first question when I told you that when the market goes up, the portfolio doesn't always go up. The index is a solution which will give at least as much returns as the rise in the market.

That instrument is called ETFs(Exchange Traded Funds) and Index Mutual Funds. Now you must be wondering how to invest in ETFs. Investing in ETFs is very easy. If you have a Demat account, if you are registered with a broker. Look for ETFs there and you will find multiple ETFs. Some ETFs follow NIFTY whereas some tracks Sensex. Which one of these you feel more confident about you can buy ETF related to that one. You can buy these anytime, and after buying its settlement is similar to that of shares And it comes to your Demat account.

Some more questinons about ETFs like how is it good for me? When should I invest in ETFs? Who is ETF best for?

ETF is best for those who don't know which stocks they should invest in. But they think that the market is growing so they have to invest But they cannot take the risk of investing in a random stock. It is better for them to invest in ETFs. Because, ETFs track the index. If the index goes up by 1%, ETF also goes up by 1%. In the longer run, you get as much returns as you the index has grown.

Tips for buying ETFs:

At the time of buying ETFs remember to check its volume, liquidity and delivery percentage. I suggest you can buy only those ETFs whose volume, liquidity and delivery percentage is High otherwise you can face difficulty at the time of selling that ETF.

Now you must be thinking if ETFs are so good, then why doesn't everyone invest in it? Everything has some risk associated with it. Some pros and some cons. I will tell you what the problem with ETFs is. ETFs have one major problem: liquidity. To explain liquidity in simple terms if you are buying shares you also need a seller who is ready to sell the shares. Whenever we go to the exchange to buy shares of a company then you get sellers. If the buyers and sellers are readily available then the liquidity of that share is good. In the case of ETFs, liquidity is a problem. There is a chance that you won't find any sellers when you go to buy. For example, when the market went up 5%, there must have been a liquidity crunch. Maybe more people wanted to buy and there weren't enough sellers. If it wasn't for the issue of liquidity, ETF is a good instrument. If you think that the market is going up you can buy ETFs without second thought. You must be thinking if there is a liquidity crunch who could solve it? If I cannot sell what I have bought, I will have a big issue.

This problem too has a solution. It is called Index Mutual Funds. Index mutual funds are like normal mutual funds. They pool money from people invest in instruments that track the index. You get as much returns from this as you get from index. But this mutual fund has an expense which isn't too much. But the advantage is that if you are in need of money, you can easily redeem. You must be wondering how index funds solve the problem of liquidity. Because Index funds receive money from a lot of sources. They do not invest all the money and retain some in cash. So that if there is a problem of liquidity they can use the cash to solve the problem.

You must be thinking that there are so many types of index funds. Many mutual fund companies offer index funds. Which among them is good?

I will tell you two techniques to find out good Index Fund.

First, the expense ratio. Expense ratio is the charge the AMC levies for managing the fund. The lower it is,the better it is for the investors. Because in this case, the investment is done directly on the index. There is less effort, then the expense ratio too must be less. So whenever you compare index mutual funds first of all, compare the expense ratio Only then you think about investing.

Second, the cash portion, As I told you index mutual funds keep some portion in cash to fulfil your liquidity requirements But before investing make sure that there isn't too much portion in cash. The more there is in cash, the less the returns will be. If there is less returns, investors also get less returns. If you keep watch of these two factors then you can choose a good index mutual fund. 

To talk about data regarding ETFs and how it is becoming popular in 2008, the market for ETFs was 800 billion. It has now increased to 5 trillion approximately. What is the reason behind this? The market is becoming more mature there is less alpha. To talk about alpha, how well people are able to time the market how much more benefits they can earn. People think that rather than losing your money chasing returns that they invest in ETFs. So that if the market goes up you get returns, And there is less loss than usual. 

After this, I will leave you with a question. What do you think is better? ETFs or Index Mutual Funds? Comment to let us know what you think.

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