The primary purpose for most individuals is to create wealth. But building wealth is a long journey and differs from one individual to another. So depending on what financial goals one wants to achieve & how much risk one is ready to take, one should plan out his/her investments.
An Exchange Traded Fund(ETFs) is a kind of security that tracks an index, sector, commodity, or other assets, but which can be purchased or sold on a stock exchange the same as regular stock. An ETFs can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities.
Key Details
1.An ETF is a mixture of securities that trade on an exchange, just like stock.
2.ETF shares prices vary all day as the ETF is bought and sold; this is distinct from mutual funds that only traded once a day after the market closes.
3.ETF can contain all types of investments including stocks, commodities, bonds, or a mixture of investment types.
4.ETF offers low expense ratios and fewer broker commissions than buying the stocks individually.
5.An ETF is marketable security which means it can be easily bought or sold.
Moreover, ETFs tend to be more economical and more liquid when compared to mutual funds.
Why Exchange Traded Funds?
ETFs are unique in several ways which make them lucrative investment options.
ETFs offers liquidity
Apart from gaining wide classification in mutual funds portfolio, ETF owners are also blessed with liquidity. Since they are open-ended funds, there is no lock-in involved. This gives ETF holders a right to withdraw their holdings as per their requirements.
ETFs are cost-efficient
Since these aren’t actively managed like most mutual funds, the expense ratio for owning an ETF is comparatively lower. When there are no management fees or commissions involved, this might increase the incremental value of the overall fund. Owning an ETF with a low expense ratio can add to your payouts when holding on to it for the long run.
ETFs offer flexibility
ETFs unlike mutual funds can be purchased/ sold at the stock exchanges. These funds can be traded on daily basis, just like intraday trading. These can be brought short and sold at a profit margin, and all of this can be done just within a day during market hours.
ETFs diversify once a portfolio
ETFs can introduce investors to completely distinct market segments. If one wishes to invest in Gold ETFs they can easily do. Having ETF as a part of one mutual fund portfolio can help one in diversifying one’s investments.
ETFs do not have a lock-in-period
As ETFs can be traded on an everyday basis, these funds do not hold any maturity period. This not only offers liquidity but liberalizes the investors with an opportunity to sell their holdings at their convenience.
Tax efficiency
ETFs are treated just like equity-oriented schemes, and hence they are tax just like any other equity-related investment schemes.
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