After insuring your risks, creating an emergency fund, investing is the next gradual step. Investing can help you grow your wealth and achieve your financial goals. However, the different investment options and over hundred mutual fund schemes, investing in the right option, can be a daunting task for many young investors. We see that many investors give up hope and continue saving money in their savings account or booking Fixed Deposits (FD). Exchange-Traded Funds (ETFs) are one of the easiest low-cost investment options for young investors.
What is an ETF?
ETFs or Exchange-Traded Funds is a basket of securities such as stocks or bonds that tracks an underlying index. ETFs are passive funds that track the underlying benchmark, and fund managers don’t actively manage these funds.
Nifty 50, Sensex are few common indices that equity ETFs track.
In simple words, you can think of ETF as a mutual fund that you can buy and sell any time, like a stock on the exchanges throughout the day.
What are the benefits of investing in ETF?
Individual investors are slowly embracing ETFs as an investment option as it comes with several benefits.
Here are some benefits of investing in ETF:
Ideal option for the first time investors: ETFs track indices and it makes ETFs a good investment option for the first time investors. As there are a few hundred mutual fund schemes, investing in an ETF makes investment easy.
ETFs track the underlying index: ETFs track the underlying benchmark. So, the stocks or securities and the proportion of these stocks in the ETF will imitate the index. Fund managers don’t actively manage these funds. Hence, the performance of the ETF depends on the returns generated by the index and not on the fund manager’s call.
Diversification: Portfolio diversification helps to minimise the investment risk. However, investing in different stocks directly may need a lot of resources. ETFs offer diversification as it is a basket of stocks and other securities. E.g. if you invest in ETF that tracks Nifty 50, you get exposure to 50 stocks without buying 50 different stocks.
Liquidity: ETFs are extremely liquid and you can buy and sell ETF units on the exchanges in real time throughout the day. The buying and selling price will depend on the current market conditions.
Low cost: Exchange-Traded Funds have low expense ratio as fund managers don’t actively manage these funds are not by fund managers. A high expense ratio may hamper your long-term returns.
Conclusion: If you have a demat account and to want to invest in a basket of stocks that you can buy and sell easily, ETFs might be the perfect investment option for you.