The main purpose of investing is to maximize your savings. Small investors can achieve this by investing in various assets such as shares, savings certificates and other less common options.
More experienced investors invest in commodities such as foreign currency, gold and cryptocurrencies. All investment options can pay off, but there are risks involved. To avoid risks in any form of investment, you should aim to diversify your investment.
If you are just starting out building your portfolio, you need to make sure that you choose options that include both low risk (fixed deposit certificates) and high risk (shares). Doing so will allow your portfolio to cover higher and lower risk investments.
However, not everyone is skilled enough to invest in any of these options at any cost. Many people do not have the time or the nerve to invest directly in any asset.
If you are such a person or have already suffered a loss in your investment and do not want to risk further reducing your savings, you can opt for the low risk options available. These fund options will help you reduce your risk and offer a relatively steady increase in investment over time. The two most common options for investing in funds are mutual funds and exchange traded funds (ETFs). We will discuss ETFs in detail.
An Exchange Traded Fund (ETF) is an investment product offered by Asset Management Companies (AMCs). It consists of a mix of securities that follow an index (called its benchmark index). ETFs are available to investors on stock exchanges through stock brokers (TREC holders). They can be traded like stocks with real time prices during trading hours on the exchange. Therefore, they share the features of both open and mutual funds and stocks.
Internationally, the demand for ETFs is increasing because of the facilities they offer and the lack of financial intelligence (and time) from investors to make the stock a success. Similarly, retail investors are wary of paying hefty fees to financial advisors and traditional mutual funds, which is why they invest in ETFs.
If you want to invest in equity or fixed income securities and find it difficult to select sectors, identify securities, research, track dividends / coupons, and capital gains, ETF does it for you. ۔ The purpose of an ETF is to track its specific benchmark index while providing the actual value of the fund throughout the trading period.
An ETF can have tens of stocks in different industries or it can be separated from a particular industry. For example, an ETF focused on banking will have different stocks from the banking industry. An ETF can also track the current index such as KSE-30 index etc.
Investors can buy and sell ETFs in the stock market through stock exchange stock brokers. A new investor will need to open a trading (brokerage) account with one of the PSX TREC holders or brokerage firms.
An existing investor in the stock market can buy and sell ETF units through his existing trading (brokerage) account with any of the PSX TREC holders.
ETFs can be bought for very little money. In the odd lot market, an ETF unit can also be bought or sold, whereas in the regular market, ETFs can be bought in a lot size of 500 units.
An Exchange Traded Fund (ETF) is a mutual fund that invests in securities linked to a particular index. Investing in ETFs exhibits a group of stocks. Instead of dealing with individual stocks, you can acquire multiple shares with a single ETF investment.
The stock in an ETF is selected based on its investment criteria. ETFs can have different investments such as stocks, commodities, bonds, or a combination of these types. Again, these are pre-determined, and you won’t be surprised if you read their investment documents carefully.
ETFs are different from mutual funds in that they can be registered in the stock markets and are bought and sold there like ordinary stocks. ETFs can be traded through both online brokers and general broker dealers.
Assets under management:
For an ETF or Mutual Fund, Asset Management (AUM) is the current trading value of all investments that it handles on behalf of investors. It’s like a company investment. AUM refers to the size of the fund, and in general, more AUM means more trading volume and better liquidity. AUM is used to calculate administrative fees and other charges.
ETFs have lower operating costs than traditional open-ended funds, and they offer flexible trading (as opposed to mutual funds) and are more transparent because they are required to disclose all their holdings.
ETFs are an easy and efficient way to invest in the stock market without the hassle of investing and researching on individual stocks. By investing in ETFs, your investment is instantly diversified into all the basic securities in the basket.
ETFs provide an easy way to diversify across different stocks, commodities, bonds, or other securities in markets where there are many ETFs in multiple asset classes.
ETFs can make two kinds of profit:
Capital Gains:
Investors can trade like stocks to make a profit by buying ETFs at a lower price and selling them at a higher price.
Profits:
The fund manager receives dividends from securities consisting of ETF basket. Profit after deduction of administrative fee etc. can be distributed among ETF unit holders.
Individual stocks and ETFs trade with each other on the stock exchange. But there are two major differences:
- ETFs are usually very diverse because they consist of a basket of stocks.
- Most ETFs track specific indexes, while stocks do not.
Better is a relative term; Investing in ETFs is generally better from a diversity perspective.
ETFs are usually passive devices designed to track an index. ETFs provide real time pricing. This means that investors can watch their prices fluctuate throughout the trading day, like shares. ETFs are bought and sold at market price through brokerage accounts and offer intra day trading liquidity. The price of ETF can be above the relevant NAV (premium) or below (discount). There is also the benefit of having NAV indicators available at certain times during trading hours to help investors make trading decisions.
By comparison, mutual funds are not valued until the end of the trading day. When cashing, you buy mutual fund units directly from the mutual fund at its respective net asset value (NAV). Investments in mutual funds can be subject to front-end or back-end load / sales charges, while in ETFs, investors only have to bear brokerage charges.
As a passive investment option, ETFs are ideal for long term investments. This depends on your investment goals, taking into account factors such as risk and return targets. Most ETFs track a core index, and as the index updates, so should the ETF.
Investing in ETFs also saves the investor time and money. Investors do not need to research and make specific investment decisions related to security. The cost of an ETF is usually lower than that of a mutual fund unit purchased.
