ETFs have created a valuable space among investors who do not have the time or expertise to analyse and select stocks of their portfolios. They have become immensely popular among investors due to the lower expense ratio and its track record of returns. It also allows investors to diversify their portfolios and is one of the best broad-market funds for beginners.
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Exchange-traded funds or ETFs are a type of investment funds that pool money from investors and invest in diversified securities like equities, bonds, commodity that tracks an underlying index. ETF have opened a new avenue of investment for retail investors as well as the institutional fund managers. ETFs help investors gain a broad exposure to the stock market and specific sectors with ease. Also, the investors have to bear low cost while investing in ETFs.
An ETF consists of a basket of stocks and investors often invest in them to reap the benefits of investing in a larger portfolio at once. ETFs can be traded like stocks and the trading value is based on the value of the underlying stocks that it represents.
See Also: Exchange Traded Funds in India
Exchange funds are better than mutual fund investments and it comes with certain benefits as well. It is a good investment and you may allocate a portion of your savings into ETFs. This is because of the fact that, if you evaluate the best performing mutual funds on the basis of value research, you will find the best performing funds are all ETFs.
Investing in ETF means investing in an index and the investors have to pay a lower transaction fee as these funds are managed passively. Thus ETFs benefits the customer through reduced risk and increase returns on investments. However, not everyone benefits from ETF investments and this is why picking the right stocks is important for retail investors.
Listed below are some of the benefits of investing in Exchange-traded funds. You can decide whether these are a good investment or not based on the following parameters:
Low cost: ETFs are a cost-efficient investment as the expense ratio of an ETF is very low compared to actively managed funds. For example, the expense ratio of ETF is less than 0.5% while that of equity funds is in the range of 2-2.5%. A lower fee means increased payout in the long-run.
Liquidity: The liquidity of an investment is key parameters that determine its profitability. ETFs are liquid investments and the liquidity of any investments gets tested when the market declines. Since ETFs can be bought and sold at any time in the day during the trading hours thus they are more liquid than other investment products like mutual funds.
Transparency: Since ETF track an underlying index, you already know the stock it holds and in what proportion. For example, the Nifty fifty holds the 50 largest listed companies in India by market capitalization. Thus an ETF tracking nifty 50 will hold the same companies and in the same proportion as the Nifty.
See Also: FAQs on Exchange Traded Funds
Diverse Product: ETFs in India track diverse products like Nifty, gold, Nifty 50 etc and several other products. You may not find mutual funds tracking all these products.
Here is a list of top exchange-traded funds in 2020:
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