What are ETFs? Which are the Best ETFs to Invest In?

ETF is an acronym for Exchange Traded Fund. These are a kind of pooled investment fund which stakes the investors’ money on diversified securities including bonds, equities and commodities which track an underlying index like Nifty and Sensex. It does so by holding securities having the same value as in Nifty and Sensex. The USP of ETF funds is that these can be traded at any time. However, you need a Demat account to do so. 

ETFs in India allow traders and investors to hold geographically diversified portfolios from getting a wide range of companies in India. India is the second most populous country in the world and its largest emerging market.

ETFs track their performance in the NSE, or the National Stock Exchange of India. This action allows investors to benefit from the Indian economy till the post-Pandemic economic recovery. India is in fact recovering faster than many countries, and ETFs allow investors to capitalize on this growth.

Benefits of investing in ETFs

1. Low cost: Cost efficiency is the biggest benefit here. ETFs have expense ratios less than 0.5%. Compare this with the expense ratio of equity funds at 2.5%. This is possible due to the incremental savings from lower fund management fees, which can go up in time through increased payouts.

2. Liquid: ETF funds are marketable security instruments, and thus can be traded on registered avenues. Since these can be traded at any time within trading hours, it is more liquid in nature than PPFs and mutual funds. This is because the price of ETFs can change at any time, but mutual funds are traded from the fund house directly at the known NAV of the day.

3. Transparent: All ETFs track an underlying index, which you know. For instance, you know from beforehand which stocks it shall have and in what quantity and proportion. ETFs also change their composition with changes in the tracked index.

4. There is no find manager error: ETFs track an index, and thus does not need active investment by a fund manager. Thus, it can’t be affected by a fund manager’s mistake.
   

5. Efficient market hypothesis: Fund managers cannot outperform the market. Besides if there are any well-known strategies, these are imitated fast. In the long run, it is beneficial to invest in the whole market instead of certain stocks. 

6. Diverse products: ETFs track various indexes like Gold, Nifty, Nifty Next 50, Nifty Low Vol 20, and more. Mutual funds may not track all of these.

What are some of the best ETFs to invest in 2021?

Invesco India ETF (PIN)

• 1-Year Trailing Total Returns: -0.7%

• Expense Ratio: 0.82%

• Annual Dividend Yield: 28.71%

• 3-Month Average Daily Volume: 16,841

• Assets Under Management: $91.7 million

• Inception Date: March 5, 2008

• Issuing Company: Invesco

• Investment strategy: Investment in both value and growth stocks, and having multiple stocks at double digit percentages

• Investment in sectors: IT, health services, financial services, heavy industry, and consumer products

• Top holdings: Infosys Ltd. (INFO:INC), Reliance Industries Ltd. (RIL:INC), and Housing Development Finance Corp. Ltd. (HDFC)

iShares MSCI India Small-Cap ETF (SMIN)

• 1-Year Trailing Total Returns: -2.0%

• Expense Ratio: 0.76%

• Annual Dividend Yield: 2.31%

• 3-Month Average Daily Volume: 38,305

• Assets Under Management: $191.6 million

• Inception Date: February 8, 2012

• Issuing Company: iShares

• Investment target: MSCI India Small Cap Index

• Tracked company portfolios: companies representing the bottom 14% of the Indian securities market by market capitalization

• Top three holdings: Apollo Hospitals Enterprise Ltd (APHS:IN); Crompton Greaves Consumer Electricals Ltd. (539876:BSE); and Balkrishna Industries Ltd. (BIL:INC), 

iShares MSCI India ETF (INDA)

• 1-Year Trailing Total Returns: -3.6%

• Expense Ratio: 0.69%

• Annual Dividend Yield: 0.32%

• 3-Month Average Daily Volume: 3,910,229

• Assets Under Management: $3.2 billion

• Inception Date: February 2, 2012

• Issuing Company: iShares

• Investment strategy: Investment in both value and growth stocks

• Index tracked: MSCI India Index

• Best for: Cost-conscious, long-term investors

• Top three holdings: Reliance Industries, Infosys, and Housing Development Finance.