What is Equity ETFs?

Whenever you think about investing in the capital market, the first thing that comes to your mind is that you need to purchase individual stocks, and this will increase the concentration risk in your portfolio. But there is an option through which you can invest in a whole basket of stocks with a single investment, which is known as “Equity ETFs”.

Now, we will give you an overview of what Equity ETFs are along with the best Equity ETFs in India. 

What are Equity ETFs?

Equity ETFs, or Exchange Traded Funds, are investment tools that primarily invest money in a basket of equity or stocks. They are traded on an exchange like any other share, and investors can purchase them in units. By investing in equity ETFs, an investor gets exposure to multiple companies through a single investment. To invest in ETFs, it is necessary to have a demat and trading account with a broker.

Key Features of Equity ETFs

The key features of Equity ETFs are as follows:

• Passive Funds: ETFs are passive investment options as the fund manager does not actively pick the stocks; instead, they invest in a basket of stocks tracking a particular index.
• Real-Time Monitoring: As ETFs are traded on an exchange, their price can be tracked in real time during the trading hours.
• Lower Cost: ETFs generally have a lower expense ratio when compared to other actively managed funds.
• Liquidity: Equity ETFs can be bought and sold on an exchange, hence providing liquidity to the investors so that they can buy and sell it anytime.
• Diversified Exposure: Equity ETFs provide exposure to a basket of stocks through a single investment, helping investors diversify across multiple companies or sectors.

Types of Equity ETFs

Equity ETFs can be classified based on the stocks, sectors, themes, or markets they track. Here are the common types:

Types of Equity ETFs	What Does It Means
Market Index ETFs	Index ETFs track a market index like the Nifty 50 or Sensex, giving investors options to a wide range of stocks. These etfs are generally replicas of Index.
Sector ETFs	Sectoral ETFs concentrate on a specific sector, such as banking, IT, pharma, or energy. This allows investors to focus on a particular area of the market which they have conviction to rise.
Thematic ETFs	This can help investors to focus on a specific  theme. Such ETFs focus on a certain trend in their investments, which may include manufacturing, infrastructure, consumption, or technology.
Dividend ETFs	Such ETFs tend to add companies with a history of dividend payments, making them attractive for investors who want to make wealth with consistent profit sharing with less risk.
International ETFs	International ETFs allow investors to participate in foreign stock, indices or markets from their own country.

How Do Equity ETFs Work?

The working of Equity ETFs is very similar to purchasing a fruit basket instead of purchasing a single fruit. The fund manager identifies the index that aligns with the investment objective and evaluates the weightage of the stocks of that index. 

Once they identify the weightage, they invest all investors’ money in stocks of that particular index. Along with this, the fund manager rebalances the portfolio regularly to align with the allocation of weightage of stocks in the portfolio. However, this can lead to tracking error in the returns of the fund. 

Read Also: What are International ETFs?

Benefits of Investing in Equity ETFs

The key benefits of investing in equity ETFs are as follows: 

• Diversification: The key advantage of investing in equity ETFs is diversification. One gets exposure to many stocks through a single investment. An investment in the Nifty 50 ETF allows an investor to take exposure in the top 50 companies of Nifty.
• Economical: As ETFs are a passive investment option, they generally have a lower expense ratio. This can keep the investment costs relatively lower.
• Transparency: By investing in ETFs, the investor gets to know exactly where their money is invested. Allowing them to adopt a transparent investment approach. 
• Liquidity: Equity ETFs are traded on stock exchanges like shares, allowing investors to buy and sell units during market hours at prevailing market prices.

Risk of Investing in Equity ETFs

The risk of investing in equity ETFs is as follows:

• Market Risk: This is one of the key risks while investing in equity ETFs. Therefore, during any market downturn, the value of your investment may fall.
• Tracking Error: An ETF reflects the performance of an underlying index. But sometimes their returns do not exactly replicate the return of the index due to various transaction charges, cash holdings, portfolio rebalancing, etc.
• No Guaranteed Return: Investment in an ETF does not guarantee a return and can be volatile during market movements. Hence, investors cannot consider it as a guaranteed return investment option.
• Sector-Specific Risk: Sectoral ETFs are concentrated in a particular industry or sector. Adverse developments, regulatory changes, or economic conditions affecting that sector can significantly impact the ETF’s performance.

How to Invest in Equity ETF

Investing in an Equity ETF is very easy nowadays. An investor is required to follow the steps mentioned below:

• Visit the Website of Pocketful: An investor is required to visit the website of Pocketful and click on the Open Demat Account tab.
• Open a Demat Account: On the page, you are required to fill in your details and add your bank account. 
• Login: Once your demat and trading account is opened successfully, you are required to log in to the trading application provided by Pocketful.
• Adding Funds: You are required to add funds into your demat account so that you can purchase the Equity ETF. Funds can be added through various online methods such as UPI, NEFT, RTGS, etc.
• Choosing the Equity ETF: There are various equity ETFs listed in the stock exchange that are offered by various mutual fund houses. One must evaluate all the ETFs and choose the best fund based on their investment goal.
• Placing Order: Once you choose the Equity ETF, you can easily buy it on the Pocketful mobile application depending on your investment amount.
• Periodic Review: Regular monitoring of your portfolio is required to book profit timely.

Read Also: What Is Nifty ETF?

Conclusion

On a concluding note, investing in an equity ETF allows an investor to take exposure in various stocks through a single investment. Buying numerous stocks carries concentrated risk, but equity ETFs allow a diversified portfolio. There are various types of Equity ETFs available in the market, and an investor can choose any one of them based on their risk profile. However, choosing an ETF does not directly eliminate market risk; therefore, it is advisable to consult your investment advisor. 

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