Exchange Traded Fund (ETF) investments are on the rise, with their total AUM increasing by 5 times since 2018. Several reasons point towards this growth, from investors wanting to try new strategies to beat the market to increased awareness of socially responsible investing.

What are Equity ETFs?

The equity ETF definition describes it as something similar to a basket investment traded on a stock exchange, like shares. These funds invest in equity funds and track a certain index, such as NIFTY 50 or S&P 500, to replicate its success. As such, they are passively managed funds.

How do Equity ETFs Work?

Through index replication, equity ETFs mimic the performance and composition of a particular stock index. This allows you to gain exposure to a diversified portfolio of stocks, much like mutual funds, without buying each stock individually. 

 

You can buy and sell equity ETFs on the stock market during trading hours. These funds are specific either to a sector, theme, or market capitalisation. This lets you invest in well-performing industries without having to pick out individual stocks of companies.

Pros of Investing in Equity ETFs

By investing in equity exchange-traded funds, you are entitled to enjoy a few benefits, such as:

  • Low Expense Ratio 

Since equity ETFs are designed to replicate a specific index fund, they do not need active management. This makes their expense ratios lower than other actively managed equity funds. A lower expense ratio means a lesser deduction in your returns, making it ideal.

  • Easy to Manage  

Equity ETFs provide you with low-cost exposure to the equity market without spending a lot of effort managing investments or researching equities. You can expect to earn the same returns per the index the ETF replicates in the industry or sector of your choice.

Cons of Investing in Equity ETFs

Like all investments, equity ETFs also have drawbacks, which makes them unsuitable for certain investors. These include 

  • These funds approximate the index’s return rather than outperform it 

  • These funds take 2 business days for settlement to get processed on selling 

 

Furthermore, this means you cannot expect extraordinary returns from your investment. Additionally, until the settlement has been completed, you cannot reinvest the funds for 2 days.  

Things to Consider Before Investing in Equity ETFs

Here are a few things you should consider before investing in equity exchange-traded funds: 

  • Tax Implication 

If you have short-term capital gains, the taxation will be at 15%. However, if you hold the investment for more than a year or have long-term capital gains, the taxation will be at 10%. This is applicable only if the gains exceed the exemption limit of ₹1 Lakh in a year. 

  • Investment Horizon  

Due to expected volatility in the stock market, equity ETFs are most suitable for investors with a long-term investment horizon. While this averages out in the long run, you have to be prepared to address how this affects the value of the investment. 

  • Assets Under Management (AUM) Size 

AUM determines the size of the fund and larger funds generally have better liquidity. As such, you should keep an eye on the total AUM.

Who Should Invest in Equity ETFs?

Equity exchange-traded funds are suitable for investors seeking to earn significant returns over an extended period. Being passively managed funds, they are suitable if you prefer not to engage in active fund management. 

 

You can also opt for equity ETFs if you wish to explore a particular sector but do not have the expertise to pick out individual company stocks. You should also invest if you understand the risks and workings of investing in an equity-based fund.

 

In conclusion, investing is a step you should take after carefully considering all the associated factors. Before investing, you must also compare different options to ensure you pick the right one. For quick comparison and easy investment, consider Bajaj Markets.

 

You can compare different equity ETFs and other investment options and choose as per your requirements. With an online investment process and minimal documentation, you can start investing without any delays. 

FAQs on Equity ETFs

What is an equity ETF?

An equity ETF comprises a bunch of stocks from a particular sector or theme. As the name suggests, it is traded on the stock exchange like shares.

Are equity ETFs more liquid than equity?

Stocks or equity are slightly more liquid than equity ETFs. This is due to the large day-to-day trading volume of stocks. This is a little more complex with ETFs as it depends on the specific fund.

Are SIPs available for equity ETFs?

Overall, ETFs rarely offer SIP options. However, a few online aggregators allow you to buy a certain number of ETF units every month, similar to how a SIP functions.

Are equity-based mutual funds safer than equity ETFs?

Since both these instruments are equity-based, neither are really ‘safe’. The volatility of the equity market affects both these investments and is only suitable for investors willing to absorb this risk.

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