ETF stands for Exchange Traded Fund. It is a kind of passive investing instrument that you can buy or sell just like any other stock from the stock market. ETFs essentially mimic certain indices such as Nifty 50, Bank Nifty, Sensex, or others. They are a type of index fund consisting of a basket of stocks or bonds. These securities are held in an ETF in the same proportion as the underlying index it is mimicking, say Nifty 50, Bank Nifty, Sensex, or others.
You can invest in ETFs in two ways. The first way is investing through lump sum investment. The second way is SIP or Systematic Investment Plan. SIP in ETF funds has become very popular among investors. Now, let’s take a closer look.
What is SIP in ETFs?
SIP in ETFs are not as prevalent as in the case of index funds.
SIP options are rare in the case of exchange traded funds.
They are one of their kind of facilities, offering you the opportunity to invest regularly and in a disciplined way in specified Exchange-Traded-Funds. They average out your ETF purchasing cost over a longer period of time, helping you to compound your investment and therefore accumulate wealth over a certain period.
Benefits of investing in ETF SIPs?
SIP in ETFs is becoming more and more popular among investors because:
- Lower fees
- It is convenient
- It uses the Rupee Cost Averaging method to eliminate volatility risk
- It helps to harness the compounding advantages, which helps in capital accumulation over the long run
When you start investing through ETF SIP, you inculcate the discipline of investing regularly. It, inadvertently, helps you accumulate wealth over the long run because it makes you invest a certain fixed amount of money regularly (every week, month, etc.). SIP ETF makes you remain committed to your long-term financial goals. The power of compounding kicks off if you reinvest your dividends and don’t take out capital returns over the long run.
It may seem that SIP in ETF funds sound similar to that of index funds. Both of them are passive investing instruments and are similar too. But they are not identical. The definition of exchange-traded funds is very similar to index funds. However, there are certain differences between them. Let’s take a Quick Look.
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SIP in ETFs vs index fund
Many people confuse between an exchange-traded fund and index fund. Let us end this confusion once and for all.
1. Definition and management style
- Index fund: It is a special kind of mutual fund, where a fund manager creates a portfolio that has the same stocks or other assets in the same proportions as the index it is mimicking. They are managed passively, where they replicate the composition of an index such as Nifty 50, Gold, Bank Nifty, or others.
- ETFs: Exchange-traded funds are similar to index funds. Most of them are passively managed. However, there are some ETFs that are managed actively too. In the latter, fund managers reallocate component stocks so that it can beat the return of the underlying index it is mimicking.
2. Demat account
- Index fund: If you want to invest in an index fund, you don’t have to use a Demat account.
- ETF: You can invest in Exchange Traded Funds only if you have a demat account.
3. SIP (Systematic Investment Plan)
- Index funds: It allows investors to invest regularly through SIP (on a weekly, monthly, or quarterly basis).
- ETFs: SIP in ETF is not prevalent. However, there are a few brokerage companies in India that help investors buy a limited number of ETF units on a regular basis (especially every month). It is very similar to the concept of ETF SIP.
Final words
You can accumulate wealth over the long run in a convenient and affordable manner by opting for SIP in ETF. There are few brokerage firms that allow you to invest in ETF SIP on a monthly basis. You can calculate SIP investment in a SIP calculator and then make a regular investment for the long term to enjoy great returns.
