To mitigate risks in the Stock Market, you should diversify your portfolio. This approach helps you withstand market uncertainties better. It preserves your capital and increases your risk-adjusted returns. But to effectively do so, you should invest in avenues that facilitate diversification. This is when Exchange-Traded Funds serve as viable options. These are pooled investment securities that operate like Mutual Funds.
They track indexes, commodities, and other assets. Moreover, investors can sell or purchase them on a stock exchange like regular stocks. Here are the notable benefits of investing in an ETF:
- Cost-efficient funds
Investing in any scheme entails operating expenses. These include custody costs, portfolio management charges, administrative fees, etc. However, this is not the case with ETFs. The expense ratio of such funds is 1.5 to 2.25% lower than actively managed funds. This is because expenses linked to client services are passed on to the brokerage firms holding the exchange-traded securities.
- Efficient performance tracking
These funds track indices, which are constructed based on market capitalisation. This discards the uncertainty of performance and helps the investor make informed moves.
- Easy to trade
Trading ETFs is relatively simple. You need not worry about evaluating your investment records or performance tracking. For example, you want to examine XYZ fund’s performance. In this case, you select an index and invest in a low-cost ETF which tracks the same. You can also estimate the returns on the fund through tools like the SIP return Calculator.
- Expert fund management
For any investment, it is essential to have extensive market knowledge. However, in such funds, you need not comply with this criterion. You only need to have sufficient information about the scheme you like. After the investment, your funds get passively managed and replicate the index. The fund manager ensures that it resembles the index closely from thereon.
- Tax perks
Buying and selling an ETF is subject to equity-oriented taxation rules. But you do not incur capital gains tax throughout the life of the stock. You only pay the tax upon the sale of the fund in question. Plus, you attract relatively lower returns-based taxation on the fund. However, this depends on the applicable tax bracket.
- Strategic diversification
Investors often wish to gain quick portfolio exposure to specific sectors, industries, or stocks. But lack of expertise holds them back. Given the wide variety of the same offered by ETF shares, investors get the opportunity to diversify their portfolios strategically. They get the chance to invest in their desired market segment.
In ETFs, the entry and exit are fixed. You may buy or sell stocks on any business day within the market timings. Also, the money you get from withdrawals is usually disbursed to your account in T+2 days. This provides you with flexibility and liquidity. You can manage your investible capital the way you want.