Advantages and disadvantages of buying ETFs

Investment through ETF(exchange-traded fund) is growing day by day. It is an essential financial instrument for retails investors for easy diversification. With a little money, a retail investor can start his investment through ETF. This article explains the types of ETF, how to trade, the Pros and cons of ETFs, etc.

ETFs (exchange-traded fund) popularity is growing day by day. Investors are looking for new alternative investment and hybrid scheme that tracks lots of stock or any other underlying asset as a single stock. ETF has fulfilled all the requirements for the investors. Now some asset management companies are also offering ETFs for mutual funds to track the different types of mutual funds. So ETFs have changed the dimension of the investment scenario.

What is ETF?

ETF stands for exchange-traded funds. ETF is similar to a mutual fund but unlike mutual funds, its value changes throughout the trading day. ETF may consist of a bunch of shares, commodities, currency, etc.ETF can be bought just like a share and can behold in the Demat account.

How is this financial instrument designed?

We can say ETF is one type of mutual fund that can be traded on the exchange. A commodity ETF tracks commodity as an underlying asset. An index ETF tracks the index of the stock market. Currency ETF is designed for tracking currency as an underlying asset. Different types of ETFs are available for different financial aspects.

Should retail investors buy the ETF?

Retail investors may buy the ETFs according to his or her risk appetite. For a retail investor, it is wise to choose index ETF. Sectorial ETFs and ETFs that tracks certain cyclical stocks should be avoided. When you sell these ETFs if you made a profit from them, then as usual tax is applicable while selling those shares.

How to choose a good ETF?

Sectorial ETF has a higher risk than any index ETFs.If you really have done your own research and want to invest in commodity then you should trade with commodity ETFs.If you predict that oil prices will go up then you should buy those ETFs that track oil. If you are interested to invest in Gold then gold ETF is a good choice for you.

What are the advantages of buying ETF?

Buying ETF offers you easy diversification. Suppose you want to track bank nifty or if you want to make a fund that has a similar return like bank nifty, then you have to invest in all those shares that are present in the bank nifty. So individually you have to buy all those shares at a time and sell at a time, that are associated with high transaction cost (brokerage) and high-value investments. If you buy a single ETF, your investment will automatically diversify and there is no need for a huge investment. You can invest as little as a single ETF share cost. You can hold this ETF in Demat just like other shares. Mutual funds nav value calculated at the end of the day, but ETF traded throughout the day. So you don't have to wait at the end of the day for selling ETFs.

Disadvantages of buying ETFs?

If an ETF is illiquid, not have enough volume in the exchange then you have to sell directly to the Asset management company and that required a minimum redemption amount. Retail investors may face problems selling a large amount of ETFs to the AMC. Actively managed ETFs have higher fees than any regular index ETFs.


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