6 benefits of investing in Exchange Traded Funds (ETFs)

Are you someone who is wondering if you should invest in stock markets but are unsure of what investment option you should pick?

An option available to you is Exchange Traded Funds or ETFs.

An ETF is a type of investment instrument that tracks and mimics a basket of securities like an index or a commodity. Similar to a mutual fund, it has a fund manager who pools money from different investors and invests according to the investment objectives of the fund. However, unlike mutual funds, ETFs are tradable in the stock market.

What are the benefits of investing in ETFs?

There are several advantages of Exchange Traded Funds:

  • Liquidity – You can buy or sell an ETF any time in a trading session. Being tradable also means its unit price fluctuates throughout the day, unlike a mutual fund, whereas the Net Asset Value (NAV) of a unit is calculated only once a day.
    Accordingly, ETFs are as liquid as stocks. Since these tend to be in demand, you can sell and redeem your ETFs at any time. Liquidity also ensures you can convert it to cash easily in case of emergencies.

  • Cost effective – ETFs are cost effective compared to mutual funds in two ways:

    • The expense ratio is low since the fund, in most cases, is only passively managed. While actively managed mutual funds tend to have a 1% to 2% expense ratio annually, ETF expense ratios can be as low as 0.05%.

    • Keeping a big stock portfolio could include multiple transactions. In an ETF, a large basket of shares is bought and sold in one transaction and this means that you can save a lot on brokerage fees.

  • Diversification – ETFs give you much more diversity in your portfolio than buying individual stocks can. This diversification can help you reap benefits from the growth of a large section of companies. This can also dilute the effects of a sudden erosion in value of a stock you own as part of the ETF basket.

  • No lock-in period – While ETFs are similar to mutual funds to some extent, they don’t come with a lock-in period, which could be true for some mutual funds. This means that you can liquidate your holding a minute after you have bought an ETF, if you want. This gives you immense flexibility, especially if you are an investor who likes to make use of sudden market movements.

  • Commodity ETFs – ETFs are not limited to stocks. Commodity ETFs, like a gold ETF, help you gain from the rise or fall of commodity prices.

  • Simplicity – Even with all these benefits, buying an ETF remains as simple as buying a stock. This could make it a great alternative to many other investment options, depending on your investment goals.

How can you tap into these ETF benefits?

Financial experts say that ETFs are a great instrument for beginners when you consider all the advantages ETFs give you. Replicating simplicity in its character, buying or selling ETFs have the same process as buying or selling stocks. Once you have a proper understanding of the markets and its risk and return prospects, you just need to find the stockbroker of your choice and start investing.


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