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  • Building a Portfolio Using Only Exchange Traded Funds

    Published on June 15, 2020

    Mutual funds are a great investment option for young investors who have at least 20 to 30 years in hand to give their investments an opportunity to grow. That does not mean individuals with a small investment horizon cannot invest in mutual funds. Mutual funds are a great investment tool that allows investors to seek some capital appreciation. AMCs owning these mutual funds collect money from investors sharing a common investment objective and invest these pool of funds across the Indian economy in stocks and other marketable securities like debt, corporate bonds, government securities, treasury bills, etc. An individual is allotted mutual fund units in accordance with the money they invested and also depending on the fund’s existing net asset value or NAV. The performance of a mutual fund solely depends on the performance of its underlying assets and the sectors in which they invest.
    Ever since their introduction to the world in the early 2000s, Exchange traded funds or ETF as they are known to have gain popularity among investors as a low cost investment tool. The major difference between mutual funds and ETFs is that ETFs can be traded at the exchange like stocks. So if you are planning to build your investment portfolio solely on mutual funds, here are few things to keep in mind.
    Investment objective: When building an ETF only portfolio, understand the primary purpose of this investment – are you investing for your sunset years or for your child’s overseas education. After that, find out how much risk you can take with your investments. The next thing to do is identify your investment horizon. Remember, the longer your investment horizon the more risk you can take. If you are investing in ETFs for regular income that you might have to consider high dividend yielding equity ETFs. If you have a high risk tolerance, you may allocate your money to ETFs that predominantly invest in small cap equities. Hence, understanding your investment objective is essential while building an ETF specific portfolio.
    Implementation of strategy: One good thing about ETF is you can buy a fund belonging to a sector or industry you want to gain exposure to. Unlike regular mutual funds, timing here is the main factor as you have to trade these securities. So it is better that you do not sell you all your ETF units in a single transaction. Follow the market trend and when the rates plunge down, buy more units. How you implement your strategy plays a crucial role in making gains from a portfolio solely dependent on ETFs.
    Use these ETFs to build your portfolio: Here’s an example of how you can start building your ETF oriented investment portfolio –
    § Gold ETFs: Gold ETFs usually invest in gold manufacturing companies and gold by trading their units on the stock exchange. As per SEBI, an ETF is “an open ended scheme which replicates/tracks the particular index. Of the total assets, this fund must invest a minimum of 95 per cent in securities of a particular index (which is being replicated or tracked)”.
    § Bank ETFs: These ETFs usually invest in stocks of banks. Bank ETFs are supposed to offer liquidity and follow the aim of outperforming their selected benchmark.
    § Index ETFs: Index funds are supposed to track the underlying index with minimal tracking error. Index funds are familiar for outperforming their benchmarks on several occasions.
    You may use a mix-match of these different ETF funds to give your portfolio some diversification as well as liquidity. If you lack investment knowledge or a completely new to the world of investing, do seek the help of a mutual fund consultant.