Axis Knowledge Nugget - 16

8 Reasons to Invest in ETFs

The primary purpose for most individuals to earn is to create wealth. But building wealth is a long journey and differs from one individual to another. So depending on what financial goal you want to achieve and how much risk you are willing to take, you should plan out your investments. Mutual fund investments can be an ideal way for someone who wants to stay invested for a long period of time. They can prove to the investment tool which can help average investors beat inflation.

For many, investing is confusing, but if you know what you are doing, it is actually pretty simple. Having a defined investment objective and a financial goal might help investors?

Ever since their introduction in India,?ETFs ?have gained popularity over time among seasoned as well as new age investors. They are the type of mutual fund you invest in, to give your portfolio some liquidity.?

What are ETFs?

In SEBI’s Categorisation, An ETF – “is an open ended scheme which replicates/tracks the particular index. Of the total assets, this fund must invest a minimum of 95 per cent in securities of a particular index (which is being replicated or tracked)”.

To simplify the same, an exchange traded fund (ETF) is somewhat similar to an index mutual fund because it follows a particular index, for example, the NIFTY 100, and is not actively managed. On the contrary, unlike an index fund, ETFs are marketable security which can be bought/sold and traded just like any other company stock throughout the day at an exchange.

Reasons to invest in ETFs

ETFs are unique in several ways which make them a lucrative investment option. Here are eight reasons to invest in ETFs:

1. ETFs offer liquidity

Apart from gaining wide diversification in their mutual fund portfolio,?ETF ?owners are also blessed with liquidity. Since they are open ended funds, there is no lock-in involved. This gives ETF holders a privilege to withdraw their holdings as per their requirement.

2. ETFs are cost efficient

Since these aren’t actively managed like most mutual funds, the expense ratio for owning an ETF is comparatively lower. When there are no management fees or commissions involved, this might increase the incremental value of the overall fund. Owning an exchange traded fund with a low expense ratio can add on to your payouts when held on to for the long run.?

3. ETFs offer flexibility

Like mentioned earlier, ETFs unlike, mutual funds, can be purchased/sold at the stock exchanges. These funds can be traded on a daily basis, just like intraday trading. These can be brought short and sold at a profitable margin, and all of this can be done just within a day during market hours.

4. ETFs diversify your portfolio

ETFs can introduce investors to completely different market segments. For example, if one wishes, they can invest in Gold ETFs, which generally track the price of physical gold as its benchmark. This allows investors to buy a commodity like gold in the form of gold ETFs. Having ETF as part of your mutual fund portfolio can actually help you in diversifying your investments.

5. ETFs are single transactions

When you purchase a mutual fund, you purchase a basket of stocks consisting of small shares across assets. But you can purchase an ETF with just one single transaction which is equivalent to owning a mini portfolio. This helps investors when they are tracking the performance, for example, if you invested in?gold ETF , you need to track the performance of gold as a commodity daily, and this makes things a lot easier for the investor.

6. ETFs do not have a lock-in period

As ETFs can be traded on a daily basis, these funds do not hold any maturity period. This not only offers liquidity but liberalizes the investor with an opportunity to sell their holdings as per their convenience. There is no holding period making ETFs an interesting investment option.

7. Tax efficiency

ETFs are treated just like equity oriented schemes, and hence they are taxed just like any other equity related investment scheme.

8. Passive fund management

This means that investors needn’t keep track of every single investment their ETF owns in. The fund manager ensures that the portfolio resembles the benchmark index with minimal tracking error.

Now that you are aware of some of the possible benefits of investing in ETFs, when are you planning on investing? Irrespective of where you invest, make sure that you follow a smart investment strategy and invest within your boundaries. It is only then that you stand a chance to get closer to your ultimate financial goal.

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Statutory Details:?Axis Mutual Fund has been established as a Trust under the Indian Trust Act 1882, sponsored by Axis Bank Ltd. (liability restricted to ?1 Lakh).?Trustee:?Axis Mutual Fund Trustee Ltd.?Investment Manager:?Axis Asset Management Co. Ltd. (the AMC)?Risk Factors:?Axis Bank Ltd. Is not liable or responsible for any loss or shortfall resulting from the operation of the scheme.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.