Understanding Exchange-traded Funds And Why They're A Good Investment Option

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posted on 11 months ago — updated on 1 second ago

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When you invest in an ETF, you get a bundle of assets you can purchase and sell during market hours.

People from all walks of life invest in the share market, but it can be a risky affair. On the other hand, investing in mutual funds and stocks will not provide the option of real-time investment. In this case, the people should invest in ETFs or Exchange-traded Funds. These funds trade on exchanges and generally track a specific index. When you invest in an ETF, you get a bundle of assets you can purchase and sell during market hours. They potentially lower your risk and exposure, while helping to diversify your portfolio. These funds track benchmarks such as the National Stock Exchange, Bombay Stock Exchange, or Nifty 50. Not just these conventional benchmarks, ETFs also track the commodities including gold and silver, themes, and sectors.

Adhil Shetty, CEO of BankBazaar, said that ETFs are similar to index funds but their expense ratio is very low. Index funds are investment funds that follow a benchmark index, such as the S&P 500 or the Nasdaq 100. The expense ratio of a fund is the fund’s total annual operating expenses divided by its average net assets. That means the investor has to spend very little extra money on these funds. According to Shetty, unlike any active or index fund, ETFs have to be bought or sold on the exchange only. These are traded on stock exchanges like stocks, bonds, and other securities.

There are many advantages to investing in the ETF. Due to these advantages, ETF has become one of the most preferred options for beginners and experienced investors. According to a report in Mint, these advantages are:

1. Diversification: These funds help in gaining instant exposure to a diversified set of underlying assets. Achieving such diversification can be a challenging and costly task through the individual purchase of stocks or bonds. This feature helps lessen overall portfolio risk by distributing investments across various sectors and industries.

2. Transparency: The majority of ETFs disclose their holdings daily. It provides complete transparency regarding the components of your investment. This empowers you to make well-informed decisions about whether the ETF aligns with your investment objectives and risk tolerance.