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Should I invest in exchange-traded funds (ETFs)?

Dhirendra Kumar sheds light on investing in ETFs

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I have my investments in mid- and small-cap funds, which are currently giving disappointing returns. Should I continue with my investments? Also, should I invest in ETFs? If yes, kindly suggest a few ETFs.
- Shaila

If you are investing in mid- and small-cap funds, then your investment horizon should be of at least five to seven years. This is because there are periods when these funds do not perform well for many years but when they do, they deliver healthy returns to make up for all the previous losses. So, if your investment horizon matches with this time frame, then you can continue with your investments. Further, many investors started investing in mid- and small-cap funds only in the last few years when these funds rose massively. So, the current underperformance has come as a major disappointment to these investors. However, if you are clear with your time frame, then stick to your investment and be prepared to face such downturns. But when these funds perform, they'll give you good returns.

An ETF (exchange-traded fund) tracks an index, replicating its performance. Unlike mutual funds, ETFs trade on the stock exchange. Thus, the procedure for buying an ETF is quite different from that of a fund. Like one buys shares through a broker, the same is done in the case of an ETF.

When we buy a fund, we don't know at what price we will be investing in, say you invest Rs 10,000 today; you will be allotted units at the price (NAV) in the evening.
When it comes to buying an ETF, one goes to a broker and places the order and the broker buys those ETF units for the investor. There is a possibility that there may be a slight difference between its market price and the NAV of the fund.

There are only a few credible ETF options available in the market like the SBI Nifty 50 ETF, which comes at a very low expense. So, if you want to invest in a large-cap fund and you invest in the Nifty ETF, the low-expense structure itself acts as an advantage. If you want to invest in international companies, then there is a Nasdaq 100 based ETF - Motilal Oswal NASDAQ 100 ETF.