How to Invest in ETFs in 2025?
Learn how to invest in ETFs in 2025 with tips on selecting the right fund, understanding iNAV, and exploring top ETF options for different risk profiles.
Exchange Traded Funds (ETFs) have become one of the most popular investment options in recent years. From holding a negligible share in the market to now accounting for 11.95 per cent of the total mutual fund Assets Under Management (AUM) as of December 2024, ETFs have significantly risen in popularity. As we move into 2025, investing in ETFs is an option many investors consider. But how can you invest in them, and what should you know before you do?
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What Are ETFs and How Do They Work?
ETFs are passive investment vehicles that track an index, similar to index funds. This means that they replicate the performance of a particular market index like the Nifty 50 or Sensex 30, without a fund manager actively managing the fund. Both ETFs and index funds don’t attempt to outperform the market, but they won’t underperform it either, excluding management fees and tracking errors.
The key difference between ETFs and mutual funds (or index funds) is that while index funds are available through mutual fund distributors or AMCs, ETFs are listed on stock exchanges and can only be bought or sold through brokers, just like stocks.
Key Considerations Before Investing in ETFs
Before investing in ETFs, it's important to understand a crucial aspect: ETF prices fluctuate based on demand and supply. Unlike mutual funds, which offer units at the Net Asset Value (NAV), ETF prices are determined by the market. This means that an ETF’s price can sometimes be higher or lower than its actual underlying value. To avoid this discrepancy, always check the iNAV (Indicative NAV) provided by the fund company, which updates every 15 seconds. Ensure that when you place an order, the price is close to the iNAV.
For example, if you buy an ETF at a price significantly higher than its NAV, your returns could be affected when the ETF tracks back to its true value. If the ETF shows a 20 per cent return over the year, but you bought it for a higher price than its NAV, your returns might be much lower or even close to zero. Therefore, always aim to buy ETFs close to their iNAV.
Top 3 ETFs to Invest in 2025
- ICICI Prudential S&P BSE Sensex 30 ETF
This ETF is a safe choice for conservative investors. It tracks the Sensex 30, consisting of the top 30 companies in India, and offers minimal tracking errors due to the fewer number of stocks in the index. With low management fees and good diversification within the 30 stocks, this ETF is ideal for investors looking for stability.
- Nippon India Nifty Next 50 Junior BeES ETF
A bit more risk-oriented than the first, this ETF tracks the Nifty Next 50 index, which includes stocks from the Nifty 100 but excludes those in the Nifty 50. This ETF provides an opportunity for balanced risk and return, with stocks from fast-growing sectors but no overlap with Sensex stocks. It's suitable for those willing to take on a bit more risk for potentially higher returns.
- ICICI Prudential Gold ETF
For those looking to diversify into commodities, the ICICI Prudential Gold ETF is a top pick. With the lack of new Sovereign Gold Bond issues, this ETF offers a viable alternative to invest in gold. Gold is known for its low correlation with equity markets, providing stability when the market experiences downturns. If you're looking to hedge your equity investments, this ETF can serve as an excellent addition to your portfolio.
Important Factors When Selecting an ETF
When investing in ETFs, always consider the following:
- Volume and Liquidity: Choose ETFs with good trading volume and substantial AUM (Assets Under Management). Low liquidity can result in wider bid-ask spreads, making it harder to enter or exit positions efficiently.
- Diversification: While ETFs offer diversification, be mindful of the number of stocks in the ETF. Fewer stocks typically result in lower tracking errors and less management effort.
- Expense Ratio: Even though ETFs are passive funds, management costs still exist. Compare expense ratios across ETFs to ensure you're not paying too much in fees.
Conclusion
In 2025, ETFs are expected to remain a popular investment choice due to their low fees, transparency, and ease of access. However, it’s essential to keep in mind the market dynamics that affect ETF prices, and always aim to purchase ETFs close to their iNAV. With a variety of options available, including safe choices like the ICICI Prudential S&P BSE Sensex 30 ETF and riskier picks like the Nippon India Nifty Next 50 Junior BeES ETF, there is an ETF for every kind of investor. Gold-focused ETFs like ICICI Prudential Gold ETF also provide a valuable hedge in uncertain market conditions.
By keeping these points in mind and selecting the right ETF, you can build a solid portfolio that meets your investment goals in 2025.
Disclaimer: The article is for informational purposes only and not investment advice.