Exchange Traded Fund: Why should you invest in ETFs

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Exchange Traded Fund: Why should you invest in ETFs | WealthDesk

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Exchange Traded Funds were created first in 1993 in Canada. The ETF Stocks have exploded ever since and in the USA alone, have crossed USD 20 Trillion in trade value over the last year. Investors in India seem to follow a similar trend as the ETF investments have exploded 14X from 2015 to 2021 with Assets Under Management of nearly INR 2,47,000 crores.  

8 Reasons why you should invest in ETFs

There are advantages of choosing stocks over ETFs, however, ETF investment cannot be ignored. Following are some of the leverage ETF offers:

ETF Funds in India eliminates volatility of individual stock 

ETFs eliminate the risk of holding individual stocks by diversifying portfolios in a way that delivers better returns while being less volatile than a stock. An ETF is a collection of a specified group of assets, where investors have a wide variety of choices to choose from, according to their risk appetite and assessment. 

An ETF can track returns of a sector, segment, group, or even a country. The multiple options available for investing in ETF Funds in India including Nifty Index ETF, Sensex ETF, Midcap ETF, BSE 500 ETF. In addition, ETFs are also available for specific sectors like banks, healthcare, and IT.

Eliminates the storage risk

Instead of buying the actual commodity and incurring the risk to store it in a safe place, Commodities ETFs help investors eliminate storage risks by offering a share of a big basket of a specified commodity at a fraction of a price.

Stock Market ETF provide flexibility in trading

Unlike traditional mutual funds traded only once per day after market close based on Net Asset Value (NAV), ETFs trade any time. The option for once daily is suitable only for investors with a long-term horizon for their investment. And infrequent trading does not affect much of their portfolio.

The prices of ETFs change continuously and are based on the pricing of the underlying assets included in such ETFs. It is relatively easier to move money from one class of assets to another.

ETF Investments can help with diversifying the portfolio

Given the wide variety of ETFs available for the investors to select from according to individual investment principles, it provides an opportunity to diversify the portfolio to manage and minimize the risk of market fluctuations. You can learn more about diversification using ETFs on the WealthDesk website. The easy trading mechanism enables the rebalancing of the portfolio in a short time.

Stock Market ETFs are traded like normal stocks

Along with the benefit of diversification, investing in Stock Market ETF stocks also gives the ability to the investors to trade the instruments in the same manner as regular stocks on an exchange do. The investor can purchase or sell as little or as much of the ETF share as they wish in the open market.

Exchanges also allow investors to trade futures and options of ETFs just like regular stocks to manage and hedge risk. Trading in ETFs is easy, like trading stocks allowing purchase and sale in a single tap from mobile applications.

Investors in ETFs also have the facility of limit orders, stop-limit orders, short-selling, and borrowing from brokers just like their stock counterparts.

High Liquidity 

ETFs are highly liquid investments. Similar to regular stocks without any restrictions of the lock-in period, ETFs can be bought and sold almost instantly in an open market on a stock exchange.

This flexibility provides investors with an advantage in making timely investment decisions. The investment strategy in ETFs can be short-term or long-term as per the risk-taking ability of the investor. Investors have several options to choose from amongst the best ETFs in India.

Lower Costs

Regardless of whether they are actively managed or passively, all the funds have an operating expense requirement attached to them. As a thumb rule, a lower expense ratio (Amount of fund’s assets used for operational and administrative purposes) means a higher return for the investor.

Compared to mutual funds, ETFs are cost-efficient with a relatively lower expense ratio. A mutual fund company services clients on buy and sell operations, sending reports and statements of transactions at regular intervals. ETFs can avoid these because the broker entirely handles the client servicing costs.

Unlike Index funds, ETFs do not have any recurring charge. They only levy a transaction charge of 0.5% and a maintenance charge of 1%, making it a fund with a low expense ratio and, therefore, higher returns.

Tax Efficiency

Transactions in ETFs are non-taxable according to standard capital gains provisions. The tax liability on such transactions depends on the underlying assets purchased by the ETFs as per specified investment policy. For example, an ETF having stockholding will be taxed as if the ETF instrument is a stock. Income from a Real Estate Investment Trust (REIT) is taxable at the special rates, but lower than the tax on a regular income.

Some specified income is directly taxed in the hands of the ETF, and the post-tax income is then distributed to the shareholders; this is called having a Pay-Through structure. In contrast, other income which is directly distributed to the shareholders without any tax consequences in the hands of ETFs is called the Pass-Through structure. However, there may be a liability to deduct tax on the source (TDS) on ETFs before distributing such income.

Thus, ETFs can have a comparatively lower liability than index funds or other mutual funds.

Conclusion:

Conduct your in-depth research and start investing in ETFs on WealthDesk. WealthDesk provides a researched-backed mix of stocks/ETFs portfolios that are created by SEBI registered investment professionals, which helps you diversify the portfolio and improve the returns on your investments. 

FAQs

How to invest in an ETF?

You can invest in an ETF by opening a Demat account in your bank for trading and registering with a broker. This will require you to complete KYC formalities. Once this is complete, you can trade ETFs through the broker or the portal provided by them.

Are ETFs safer than stock?

An ETF Stock or Equity Exchange Traded Fund is a basket of different stocks of a particular category in a single instrument that facilitates investors to mitigate risks of investments in an individual stock.

Is it smart to invest in ETFs?

ETF Investment is a smarter choice than investing in individual stocks, bonds, or commodities as investors do not need to buy individual investments. By investing in an ETF, an investor can invest in a particular category at a fraction of the combined cost of individual instruments.

What is the downside of investing in ETFs?

No matter what ETF investment strategy an investor follows, they can not get an absolute assurance of earning positive returns from investment in ETF stock because there is an inherent downside risk that when stocks of a particular category move downwards, ETFs will also follow the same trend.

How long should you invest in an ETF?

Various ETFs designed and curated to meet the investment goals are available in the market. You can find ETFs geared for long-term, short-term, low volatility, high diversification, sector-specific ETFs, or even SIP options. Find the ETF that suits your investment needs on WealthDesk where we provide a researched-backed mix of stocks/ETFs portfolios that are created by SEBI registered investment professionals, which helps you diversify the portfolio and improve the returns on your investments.