There is a mutual fund scheme available in India for every investor's needs. These schemes could be actively managed or passively managed. For a new investor in mutual fund the different schemes available could present confusion as to the choice one should make. In this article we will discuss two types of funds that a new investor may choose to gain equity exposure. These are:
- Exchange Traded Fund, or ETF
- Hybrid Funds
Let us understand each of them in detail.
- Exchange Traded Funds:
An Exchange Traded fund or ETF as it is also called, is a fund created with the pooled investment of investors and it invests in a basket of securities like stocks, bonds or commodities etc. somewhat similar to a mutual fund. The exception here is that ETFs are traded on the Stock Exchange whereas mutual funds do not. An ETF mimics a market index like the Nifty 50 or Sensex, or the price of some commodities like Gold or Silver. An ETF aims to track the performance of its benchmark index by holding all or a representative of the stocks underlying the benchmark it tracks. For example, the Nifty50 ETF invests in the stocks of the top 50 companies listed on the Stock Exchange of India.
An Exchange Traded Fund offers diversification to the investors who enjoy real time trading facility on the stock exchange, much like the way trading in stocks is carried out. Hence, investors in an ETF need to open a Demat account before they can invest in them.
Since the ETF funds mirror a market index, they do not need any active management; so, the fees and charges associated with the ETF are lesser compared to actively managed mutual funds. The trading value of the ETFs is based on the underlying stocks that it represents. The stocks of companies are traded at different prices based on the market fluctuations. Therefore, an ETF also has different prices fluctuating through the business day.
An ETF is suited to the new inventors as they can buy them with a very small investment that will allow them to participate in the Equity markets. The need to rebalance the portfolio is also eliminated as the ETF already has a diversified portfolio.
- Hybrid Funds
Hybrid funds are those funds which invest in a combination of equity and debt funds in some ratio. Suited to the new investors who are looking for some equity exposure but do not want to take a high risk, the debt portion of the hybrid portfolio offers stability to the investment portfolio.
There are different types of hybrid funds available that may suit the risk appetite of the investors. These are:
- Conservative Hybrid funds: These funds invest 10-25% of its assets in Equity and the rest is invested in debt securities. Therefore, this type of fund is suited to the conservative investor with a low-risk appetite.
- Aggressive Hybrid funds: These funds invest 65-80% in equity and the rest in debt and are suited for investors who have a high to very high-risk appetite.
- Balanced Hybrid funds: In this there is a debt equity ratio ranging between 40-60%, offering a balanced portfolio with stability and fixed income from debt coupled with an exposure to the equity market.
- Dynamic Asset Allocation Hybrid funds: These funds have a flexible asset allocation between debt and equity. The aim of this fund is to earn maximum returns by balancing the debt equity ratio.
Consult your mutual fund distributor or financial advisor to advise you on the best ETF or hybrid fund for your requirement.
