Exchange traded funds or ETFs as they are commonly referred to as carry several features which is why more and more young individuals are considering investment in these market linked schemes. Through investments in ETFs, one can seek diversification that too with very low investment costs. Investors have total control over their ETF investments as their units can be traded throughout live trading hours. ETF is a unique mutual fund product that offers high liquidity and low expense ratio.
Here are 4 solid reasons why retail investors can consider ETFs as a long term investment option –
Investors can choose from a variety of ETFs
Earlier, when ETFs were introduced their investment objective was simple, to track the performance of an index like NIFTY50 or SENSEX30 with minimal tracking error. However, today we have ETF products including almost every asset class like stocks, bonds, gold, real estate, currencies, international securities etc. Not just this, they have also expanded across several sectors and industries and many other niche markets as well. There is so much competition among AMCs that has resulted in the introduction of ETF products which are specific enough for investors to target sectors / industries / markets which they find appealing. With so many varieties of ETFs investors can actually have a diversified investment portfolio and restrict a certain amount of capital only for investments in exchange traded funds.
ETFs offer liquidity
Investors cannot trade index mutual funds as their NAV is determined at the end of the business day. However, with ETFs investors have full control over their investments as ETF units can be traded throughout the business day. Immense liquidity means that investors can buy or sell their ETF units just like any other company stock. ETFs are more liquid than some mutual funds like ELSS which come with a predetermined lock in period of three years. Those looking to add some liquidity to their mutual fund portfolio too can consider investing in exchange traded funds.
Low management costs than active funds
Mutual fund products are broadly categorized as actively managed and passively managed funds. ETFs are passively managed funds who have a relatively low expense ratio. This why it is more cost effective to own an ETF as compared to active funds that have a relatively high expense ratio. An expense ratio is the annual management fees which all mutual fund investors have to pay to the fund house. These fees are deducted from the investor’s capital gains and this is why it is better to invest in a scheme that has a low expense ratio.
ETFs portfolios are simpler to track
When an individual invests in a mutual fund scheme, they invest purchase in a basket of securities consisting of small shares across assets. However, in case of exchange traded funds, when investors choose a particular scheme for investment, this is helps investors them in tracking the performance of the underlying securities. For example, if a retail investor invested in gold ETF, all they have to do is track the performance of gold as a commodity on a day to day basis and accordingly decide on their intraday activities.
ETFs can be one way to gain understanding of the stock markets. Since there are literally hundreds of schemes to choose from, investors have the choice of evaluating and determining which ETF scheme to invest in. ETFs are a low investment option and can be traded throughout the day thus offering immense liquidity. Investors who wish to gain a deeper understanding about the markets can consider investing in ETFs.