Reasons to Invest in Exchange-Traded Funds

An Exchange Traded Fund or ETF is a pooled investment security. It operates like Mutual Funds, wherein particular indexes, sectors, commodities, and other assets are tracked for performance analysis. ETFs can be purchased or sold on a stock exchange like regular stocks. Investing in an Exchange Traded Fund includes some perks that should boost your investment journey. For example, investors can access more stocks across various industries.

Also, these funds are relatively easier to trade. While these are just a few reasons to invest, consider other benefits:

  1. Cost-effective

All funds, regardless of structure, entail operating expenses. These include portfolio management fees, custody costs, administrative expenses, etc. However, the expense ratio of ETFs is usually 1.5% to 2.25% lower than actively managed funds. Such lower costs are a by-product of client service-related expenses being passed on to the brokerage firms holding exchange-traded securities in customer accounts. This gives investors a significant advantage in cutting down on costs.

  1. Performance tracking

Such funds track indices, which are constructed based on market capitalisation. This discards the uncertainty of performance and helps the investors stay on track.

  1. Simplistic approach

Investing in ETFs is simple. You need not assess past records, inspect the fund manager’s investment style, or worry about tracking performances. For instance, If you wish to study a particular fund’s performance, you can select an index and invest in a low-cost ETF which tracks them. They may also use tools like a Lumpsum SIP calculator to estimate returns on the fund.

  1. Liquidity

The entry and exit in such schemes are fixed. You can buy and sell stocks on any business day, during the market timings. Moreover, the money you receive from withdrawals is disbursed to your account in T+2 days. This liquidity makes it easy for investors to manage their invested wealth per their needs.

  1. Tax benefits

The buying and selling in an Exchange-Traded Fund are subject to Equity-oriented taxation rules. However, 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. You also attract relatively lower returns-based taxation on the fund. But this depends on the applicable tax bracket.

  1. Passive fund management

Before you invest in any fund, you should acquire extensive market knowledge. But this criterion is not mandatory in ETFs. You need to have enough information about the scheme you like. After the investment, your funds get passively managed and replicate the index. The fund manager ensures if it resembles the index closely from thereon.

  1. Portfolio diversification

Investors often wish to gain quick portfolio exposure to specific sectors, industries, or stocks. However, lack of expertise holds them back. Investors can diversify their portfolios efficiently considering the variety offered by ETF shares. They get to venture into their desired market segment effortlessly.

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