Exchange-traded funds are similar to stocks of companies in terms of pooling the funds together to invest in a variety of investment assets from different sectors.
The fund managers of ETFs will pool the funds from different investors based on their requirements and risk level and then invest the funds in debt securities like bonds, and other financial assets like derivatives and shares.
Over the years, investors have started taking interest in ETFs over stock trading as it is more cost-effective and transparent. Thus, this article recognizes the trend and explores the top exchange-traded funds in India in 2023.
Factors to look into before investing in ETFs
If you are new to the ETF market, then consider the following factors before outrightly investing in them.
Diversification
Exchange-traded Funds do not promise the best diversification and mitigation of risks. The reason is that most ETFs are passively managed to mean that the fund will consist of only the best-performing listed companies with strong financials.
Usually, one downside of ETFs is that they do not give importance to small-scale companies even if they have good growth potential.
Stock Market Volatility
The ETFs may go for the best-performing stocks of listed companies but are not safe from market volatility. Irrespective of how well a company performs, during times of market and price fluctuations, no company can stay stable.
If you are looking for stability, then opt for government bonds as they are hedged against inflation and market volatility. Now it is up to you whether you want to take the risk of incurring loss and earning profits or choose stability.
Brokerage Fees & Demat Account
Since ETFs are also similar to trading shares, they also incur brokerage and other transactional charges. Like in trading, a stockbroker handles the buying and selling of shares, in ETFs, it is done by fund managers.
The ETFs provide the flexibility of letting you choose to opt to transact yourself and save on paying charges to fund managers. Irrespective of this, you will have to open a Demat account which will be used to hold the assets.
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India’s Top Index ETFs
Below five ETFs are mentioned who are benchmarked against different indices and which can be a good investment prospectus for 2023.
Edelweiss ETF – NQ50
The scheme closely follows the total returns of the Nifty 100 Quality 30 Index. It seeks to give importance to providing returns before the expenses are incurred.
HDFC Sensex ETF
The scheme closely follows the S&P BSE SENSEX Index. The returns generated from the securities of this scheme, before expenses, are almost equivalent to that of the benchmark index.
Motilal Oswal NASDAQ 100 ETF
This scheme closely follows the investment return of the NASDAQ 100 Index and ensures that securities added to the fund portray an equivalent performance as the ones in the benchmark index.
UTI Sensex ETF
The strategy tries to provide returns that, before fees, closely correspond to the total returns of the securities represented by the underlying index, subject to tracking error.
SBI ETF Sensex
The scheme closely follows the returns of BSE Sensex by holding the BSE Sensex Stocks in the same proportion as the index. This helps the fund earn similar profits as the benchmark.
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Benefits of Investing in Exchange Traded Funds
ETFs tend to be slightly less risky as the funds usually contain the stocks of best-performing listed companies. Apart from this, there are a few more benefits of trading in ETFs.
Tax Advantage
The exchange-traded funds are known to be tax efficient in the market. The reason behind this is that transacting in the open market, that is buying and selling of shares, does not impact the tax obligations of the Exchange-traded funds.
Exposure
When it comes to stock investments, exposure can be seen as a good or bad thing. However, it depends on your perspective and risk tolerance level.
But in general, the more exposure the portfolio has in the equity market, the higher the chances of receiving good returns. This is also the case with ETFs.
The funds may go to best-performing companies, however, the stocks are selected from diverse sectors providing the necessary exposure and portfolio diversification.
Low Cost
Exchange-traded funds are termed affordable investment tools as their expense ratio of it is even lower than that of Mutual Funds.
Transparency
Exchange-traded funds also bring transparency to the table. Fraudulent activities are ever present in the stock market, which comes from a lack of transparency in the transactions.
In midst of this, ETFs provide complete transparency as the holdings are published daily.
Liquidity
As the popularity of this investment asset is growing, the market is becoming more accepting of it. Thus, it becomes easy to buy and sell ETFs in the market throughout the trading period.
Conclusion
The above-mentioned ETFs are the top exchange-traded fund in India. Investing in them will bring just the right amount of diversification and exposure to your portfolio.
However, remember that before investing in the ETFs, do your research to make sure that the overall return and risk in the portfolio are meeting your financial requirements.
If ETFs are properly utilized, it will make it easier to reach your financial goals.
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