Benefits of ETFs | Exchange Traded Funds

Exchange Traded Fund (ETF) is a security that tracks a basket of shares like an Index, or a commodity like gold, silver or bonds. ETFs are listed and traded on a Stock exchange.
Index ETFs are a basket of securities which trade like a single stock on the Stock exchange. Furthermore ETFs give the benefit of diversification as they invest in a basket of stocks that comprise the index they track. Benefits of ETFs are as follows

Benefits of ETFs | Benefits of Investing in ETFs

1. Passive Fund Management

ETFs are passively managed funds means the Fund manager doesn’t decide which stock to buy or sell he just buys the stocks of the Index which the ETF tracks. ETFs just recreate / replicate the performance of the Index which they track, they do not try to out beat the Index.

2. Portfolio diversification

Index ETFs give the benefit of portfolio diversification to investors because they invest in a basket of stocks that comprise the Index they track. A Nifty 50 Index ETF will invest in shares of the Nifty 50 Index in the same proportion as the Nifty 50 Index. Moreover the Fund manager will just replicate the performance of the Index they track and do not try to outperform the Index.

3. Portfolio diversification across Asset classes

Investing in ETFs is also a good way to diversify your portfolio across various asset classes like Debt, Equity, Gold. There are different types of ETFs like Nifty 50 Index ETFs, Nifty Next 50 Index ETFs, Nifty Midcap Index ETFs, Nifty Small cap Index ETFs, Sensex ETFs, Gold ETFs, Bond ETFs. Furthermore different ETFs invest in different securities and give the benefit of portfolio diversification and risk diversification to Investors.

4. Affordability

Since Investing in ETFs is very affordable. A person can invest very small amount of money in ETFs, a person can invest as low as 1 unit of ETF. The investment amount can be as low as Rs. 200.

5. Variety of ETFs

Specifically, Investing in ETFs gives the benefit of Variety. As we know There are various types of ETFs available in the market to invest in. There is a wide variety of ETFs in India like the Index ETFs , Nifty 50 Index ETF, Nifty Next 50 Index ETFs, Nifty Midcap Index ETFs. Furthermore Nifty Small cap Index ETFs, Sensex ETFs. There are also Gold ETFs, Silver ETFs, Bond ETFs, Liquid ETFs.

Benefits of ETFs | Advantages of Investing in ETFs

6. Transparency

There is a lot of transparency when you invest in ETFs. The price of the units of ETFs is calculated based on the Net Asset Value of the underlying shares of the ETF. Furthermore the price changes throughout the day depending on the change in prices of shares it comprises of. A person can buy ETFs at real time market prices.

7. Convenience of Investing

Investing in ETFs is very convenient. A person can invest small sums of money regularly in ETFs. ETFs are listed and traded like stocks on the stock exchange (NSE, BSE). ETFs can be bought and sold on the exchange throughout the day during market hours at real time prices.

8. Tax benefits

Most important to note Index ETFs are tax efficient. If held for more than a year they are charged to Long term Capital Gains tax at 10%. If held for less than one year they are charged to Short term capital Gains tax of 15%.

9. Regulations – SEBI – transparency

ETFs are regulated by the Securities Exchange Board of India (SEBI) under SEBI Mutual funds Regulations 1996. SEBI has laid down strict regulations to protect Investor interest, for transparency in dealing, transparency in managing money and fair valuations.

Benefits of ETFs | Benefits of Exchange Traded Funds | Advantages of Investing in ETFs

10. Low cost

ETFs have a lower expense ratio and lower administrative costs due to passive fund management and hence they are cost efficient.

11. Liquidity

ETF investments are very liquid means a person can buy and sell ETFs on an exchange just like shares on any business day during market hours at real time prices. The sale proceeds will be credited to their account in T+2 days. ETFs are very liquid and trade close to their NAVs as they are traded in the secondary market.

12. ETFs give better Risk adjusted Returns

Since Index ETFs are passively managed and their portfolio is diversified in a basket of stocks the risk is reduced drastically. Hence ETFs give better risk adjusted returns to investors.

13. Market Linked Returns

Moreover Index ETFs give market linked returns. An Index ETF will invest in shares of the Index they track in the same proportion as the Index. The Fund manager doesn’t decide which stock to buy or sell he just buys the stocks of the Index which the ETF tracks. ETFs just recreate / replicate the performance of the Index which they track, they do not try to out beat the Index.Index ETFs will give returns similar to the returns of the Index it tracks.

14. Suitable for Novice | New Investors also

Above all ETFs are suitable even to Investors who are new to the stock market and do not have much understanding of which stocks to buy or sell but want to take advantage of the stock market and get market linked returns. As the portfolio of Index is diversified in a basket of stocks the risk associated is reduced drastically and hence better risk adjusted returns for Investors.

Conclusion

To conclude Exchange Traded funds are passively managed, they give the benefit of portfolio diversification. Further they are low cost, give better risk adjusted returns, also suitable for novice / new investors. Furthermore they have high liquidity, give market linked return, give convenience of investing. Moreover there is variety to choose, they give tax benefits, there is transparency, affordability. The multiple benefits of ETF’s make them a very attractive investment option for Investors.

Disclaimer: the above information is for educational & informational purpose only. It is not an advice to Buy or Sell Financial Securities. Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing.’