Like stocks, some funds can be traded on the stock exchanges, and such funds are known as Exchange Traded Funds (ETFs). They are also similar to mutual funds in way that, just like them, they are also a pool of different securities. However, their availability in exchange for trading purposes makes them distinct from mutual funds. Thus, we can say that ETFs share their features partly with both shares and mutual funds but with neither of them.
All About Different Types of ETFs
An Exchange Traded Funded can be comprised of varying securities such as equity, debt, currency, and derivatives. And it is its major component that decides its type.
Equity ETFs
As the name suggests, Equity ETFs have their maximum allocation in equity. They can be used as an index of equities to identify those sectors that are doing well, such as the banking sector or the tech sector. Or you can also use them to track stocks belonging to different market capitalizations to understand where you should invest your money, in large-cap, mid-cap or small-cap.
Bond ETFs
Bond ETFs are also known as Fixed Income ETFs. Professionals often invest in ETFs of this category to get steady returns at lower risk. You can also use this ETF to generate a regular flow of income. Bond ETFs also help you reduce your market risk by adding an element of diversification to your portfolio.
Currency ETFs
Currency ETFs invest in either just one currency or a multitude of them. These ETFs also invest in different currency derivatives to leverage the price movements in the forex market. You can consider investing in currency ETFs if you wish to hedge your portfolio against the currency risk, considering the ongoing depreciation of the INR.
Liquid ETFs
Liquid ETFs are the ETFs that invest in money market instruments maturing in the short term. They are ideal for traders and investors who want to park their ideal funds in the market but, at the same time, want them to be highly liquid. Since the underlying assets in this ETF are money market securities, they also carry a low market risk and can be used for diversifying the portfolio.
ETF of ETFs
Since ETFs are a basket of varying securities that can be traded on an exchange, they can also be a pool of different ETFs. And such an ETF is called a Fund of Funds (FoF). These ETFs are highly diversified as each fund is a combination of varying securities.
Conclusion
If you are looking for a mutual fund that you can also trade on an exchange, you must invest in ETF, as they are the right investment choice for you. They offer you the best of both worlds – stocks and mutual funds, partly but sufficiently enough. Choose the type of ETF that best matches your investment style and risk profile.
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