What are ETFs - Types, Benefits, and How to Invest

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Indian investors are increasingly turning to Exchange Traded Funds (ETFs) for their affordability and diversification. Unlike traditional financial products such as mutual funds or stocks, exchange traded funds are passively managed, highly liquid, and come with minimal fees. In this guide, we’ll explore the meaning of exchange traded funds, their types, benefits, risks, and the way to begin investing in these dynamic exchange traded products.

What is Exchange Traded Funds (ETFs)?

An ETF, or Exchange Traded Fund, is a type of exchange traded investment designed to mirror the performance of a market index such as the Nifty 50 or BSE Sensex. These funds replicate index performance by holding a basket of securities that mirror it. Many affluent investors are now accessing curated ETF baskets through platforms like DBS Treasures, which offer expert-backed portfolios designed for long-term wealth building.

Unlike mutual funds, exchange traded funds are listed and traded on stock exchanges, making them as accessible as stocks. This allows investors to buy or sell units at any point during the trading session.

How Do Exchange Traded Funds (ETFs) Work?

To understand how exchange traded products function, remember that ETFs are not actively managed. A fund manager adjusts to ensure the fund aligns with its benchmark index.

For example, instead of individually purchasing all 30 stocks in the BSE Sensex, investors can simply buy units of a Sensex ETF. This creates a cost-effective and streamlined way to track the index’s performance — a smart strategy for building a balanced Mutual Fund Portfolio.

Types of Exchange Traded Funds (ETFs)

In India, exchange traded products span across various sectors, asset classes, and strategies. Below is a breakdown of the different kinds of exchange traded funds available:

Index-based Funds

Asset Class-based Funds

Global Exposure Funds

DBS Treasures customers can explore global and thematic ETFs through digiPortfolio, curated with insights from CRISIL to suit distinct investor goals. For those looking to build a smart and global Wealth Management strategy, choosing the best exchange traded funds depends on your goals and risk appetite.

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Benefits of Investing in ETFs

Investing in exchange traded funds offers a range of advantages that make them an attractive option for both novice and seasoned investors.

1. Diversification
   ETFs allow you to access a variety of stocks, bonds, or sectors in a single trade. This helps in spreading risk and improving potential returns, making it an ideal addition to your Mutual Fund Portfolio.

2. High Liquidity
   Exchange traded funds in India are traded throughout market hours like shares. This enables flexible entry and exit — a key advantage over mutual funds which are settled only at day-end NAV.

3. Lower Costs
   Because they are passively managed, exchange traded products usually have lower expense ratios than traditional mutual funds. Plus, there's no fixed investment amount — making it budget-friendly even for investors funding from a Premium Savings Account.

4. Tax Efficiency
   ETFs are taxed depending on the asset type:

• Dividend income from ETFs is taxed based on your applicable income tax bracket.
• Capital Gains:
• Short-term (less than 1 year): 15%
• Long-term (more than 1 year): 10% on gains over ₹1 lakh

Disadvantage of ETFs

While exchange traded funds come with several advantages, it is important to understand their limitations before investing.

1. Tracking Error
   ETFs aim to replicate an index but sometimes fall short due to factors like fund fees or rebalancing delays. This difference is known as tracking error, and it can impact overall returns.

2. strong> Lower Dividend Yields
   Since exchange traded investments are designed to follow a specific index or sector, they may offer lower dividend payouts compared to traditional dividend-paying stocks. This can be a drawback for investors who rely on regular income.<

3. Complexity for Beginners
   Some types of ETFs such as leveraged or inverse ETFs can be difficult to understand and may not perform as expected. Investors should be aware of how these products work and how they fit into their overall exchange traded investments strategy.

How to Buy and Sell ETFs?

Getting started with exchange traded funds in India is simple and works much like trading individual stocks. Here's how you can buy and sell ETFs efficiently.

How to Buy ETFs

• Open a Demat and trading account with a registered broker.
• Fund your account using a bank transfer or from a Premium Savings Account. DBS Treasures clients enjoy a seamless digital experience through DBS Treasures mobile and web platform, backed by personalised wealth support.
• Research ETFs that align with your investment goals — index-based, sector-specific, or asset-backed.
• Place your buy order during market hours. ETFs are traded on stock exchanges in real time.

How to Sell ETFs

• Log in to your trading account and go to your holdings.
• Select the ETF you wish to sell.
• Place a sell order based on current market prices.
• The proceeds are credited to your trading account after the sale is executed.

Things to Consider Before Investing in ETFs

Before investing in exchange traded funds, it’s important to evaluate how they fit into your overall strategy and what risks or nuances to watch out for. This can be helpful in picking the best exchange traded funds for investment.

1. Know What You’re Investing In
   ETFs can track equity indices, sectors, commodities, or bonds. For example, debt ETFs invest in fixed-income instruments. If you're unfamiliar with these, understanding debt fund can offer useful perspective.

2. Expense Ratio Matters
   Although ETFs generally have lower costs than mutual funds, their expense ratios can vary. Even small fee differences can impact returns over time.

3. Check Liquidity
   Look for exchange traded products with high trading volumes and tight bid-ask spreads. This ensures smoother transactions when buying or selling units.

4. Align with Your Goals
   Make sure the exchange traded investments match your investment goals, whether it’s long-term growth, diversification, or short-term tactical exposure.

5. Understand Tax Impact
   ETF taxation depends on the type of ETF and your holding period. Knowing how capital gains and dividends are taxed helps you plan better.

Conclusion

Exchange traded funds are a simple, low-cost way to diversify your investments. Whether you're building a new strategy or enhancing your existing investments, ETFs offer flexibility and ease of access.

Whether you’re building your first ETF strategy or expanding a diversified Mutual Fund Portfolio, platforms like DBS Treasures offer the tools, insights, and global access to help you invest with confidence and convenience. That’s banking, elevated.

Disclaimer: This content is for informational purposes only and should not be considered financial advice.

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