In recent years, India investors prefer exchange traded fund or ETF as their investment options. As a result, ETFs have advantages over conventional mutual funds and individual shares. Here are the top 5 benefits of investing in ETFs:
- Easy Diversification
The major advantage associated with buying EFTs makes it easy for investors to diversify their portfolio. ETF is made up of various types of stocks, bonds, and other assets. Investing in a single ETF enables you to spread your investment over many firms. This minimizes risk levels than when investing on few stocks or a single stock. One investment in an ETF can provide access to many companies because these are focused on different market indices such as Nifty 50, Bank Nifty, and even sector-specific indices.
- Low Cost
The cost of running ETFs is way below that of a majority of actively managed mutual funds. This percentage indicates all annual charges of an ETF, known as the Expense Ratio. This is because ETFs track market indices passively and therefore do not incur as much research cost as required by active stock picking. As such, they keep an eye on their expenses, ensuring that they are less than 1% on average. On the other hand, the expense ratio for the popular actively managed mutual funds range between 2 and 3 percent each year. In the short run, lower costs lead to higher returns to investors in the long run.
- Tax Efficiency
Moreover, another important benefit of ETFs is that they have a lower tax compared to the ordinary mutual fund. The profits resulting from the sale of a particular unit from an ETF are subject to a taxation policy as they occur rather than a general taxation applied at the end of a certain period as would be applied if a particular portfolio had been tracked through various market trades like those of other common However, earnings from mutual funds are taxable on an annual basis regardless of whether some or all the shares are disposed off. In addition, index ETFs have minimal tax losses stemming from frequent turnover unlike their actively traded counterparts.
- Transparency
Investors in ETFs understand well what ETF is invested in, hence the high level of transparency associated with it unlike other types of mutual funds. At all times, investors have a clear picture of what underlies the entire system, meaning the securities and stocks used. The degree of openness is so high that even an investor can track performance and evaluate risks as they occur easily than traditional mutual funds where information on portfolios comes in a periodic basis.
- Flexibility and Liquidity
ETFs get quoted and sold in the same manner as other types of stocks on stock markets. ETF units can be purchased or sold for investors at any time during market hours. it is much more flexible than close-ended funds as you can purchase or redemption only during subscription and redemption windows respectively. Furthermore, good market liquidly is provided by ETFs due to the fact that there is usually a high market price relative to the net asset value traded during each trading hour. They are therefore preferable to short-term investors, long-term, as well as those who seek capital preservation.
Conclusion
ETFs are emerging as one of the most preferred investment instruments in India thanks its advantages in providing easy diversification, low cost, tax efficiency transparency and relative flexibility etc. They are also a good fit as long term 5paisa investors who would engage in buy and hold strategy due to their passive investment style. Individuals interested in constructing a diversified, low priced portfolio in compliance with their goals should include ETFs. It is always good to do proper research about various ETF categories prior to investiment.
