People invest in the market to earn extra revenue. They want the said extra revenue because they believe that it will help them to take care of their expenditures after retiring. However, before starting with fund allocation, it is important to remember that the act of investing is a long-time commitment and this action will help you with long-term wealth accumulation. When it comes to investing, the income earned from the investment plans is as good as the portfolio the investor constructs. To get the portfolio right, you must get the allocation of assets i.e., equity, debt, and commodity, aligned with your investment objectives.
To get the portfolio right, it is of utmost importance that you are required to spend sufficient time studying and scrutinizing all asset classes and after that, you should determine the level of allocation. Several macro and micro factors are known for having an impact on the market sentiments, which will result in sharp variation in performance. Making sure to stay up to date on all these factors, may not be easy for new investors. That’s where ETFs can be helpful.
Exchange-traded funds (ETFs):
A prominent example of a passive investment instrument, exchange-traded funds (ETF) is known for being shared investment funds that function by tracking and replicating an index. The said index can then allocate funds to different asset classes such as debt, gold, and equity. Through this action, ETFs function like a mutual fund scheme in a way. Generally, these funds track a particular index, commodity, sector, or other assets. But, the one way they differentiate themselves from mutual funds is that exchange-traded funds can be purchased or sold on an exchange in the same way that stocks can.
What are its salient features?
- These funds consist of a group of securities that can be traded on an exchange like stocks.
- They also are known for offering fewer broker commissions and low expense ratios.
- ETFs are also known for coming with all types of investments, including stocks, bonds, and commodities. There are some ETFs that are also known for even offering country-specific holdings. Simultaneously, some remain international.
- The prices of shares are known for fluctuating throughout the day as ETFs are bought and sold. This aspect makes them different from mutual funds as the latter is known for trading once a day and that too after the market closes.
What are the reasons behind investing in ETFs?
Here are some of the reasons that you should consider opting for ETFs:
- ETFs offer trading flexibility:
Exchange-traded funds also provide trading flexibility. With these mutual funds actions such as intraday trading is possible during market hours. Intraday trading, also referred to as day trading refers to the act of purchasing and selling off stocks on the same trading day. The flexibility of ETFs ensures that you make better use of trading opportunities that arise in a day.
- These funds have high liquidity:
Apart from trading daily on the exchange, ETFs are known for not having a lock-in period. This means that you can enjoy the benefit of liquidity. It also means that you have the freedom to redeem your investments easily whenever you want.
- It is easy to diversify in ETFs:
Exchange-traded funds are known for exposing an investor to multiple asset classes. These asset classes include things such as bonds, equities, and gold. These asset classes are known for behaving differently and have little to no co-relation in their performance. Furthermore, diversifying investments will help cushion the negative performance of a single asset class and thereby protect returns.
ETF benefits such as liquidity, flexibility, diversification, and transparency, prove that they are a viable investment option. After determining your financial goals, you can proceed to opt for an ETF.