What are ETFs?
ETFs (Exchange-Traded Funds) are index funds that can be bought and sold in the live market, just like stocks. They provide investors with exposure to various indices and asset classes. Now, let’s discuss the pros and cons of investing in ETFs.
Benefits of Investing in ETFs
✅ Live Transactions
- ETFs can be traded in real-time at market prices.
- A great option for investors who use technical analysis to make investment decisions.
- Unlike mutual funds, where the order is executed at the NAV (Net Asset Value) at the end of the trading day, ETFs offer flexibility in trading.
✅ Low Cost
- ETFs are passively managed since they track an index.
- No need for active fund management, which reduces expense ratios.
- Example: Many ETFs have lower fees compared to actively managed mutual funds.
✅ No Exit Load
- ETFs do not charge exit loads, unlike mutual funds.
- You can sell an ETF within an hour or after months without additional charges.
- However, brokerage charges may apply, so keep that in mind.
✅ Diversification
- Investing in an ETF means indirectly investing in multiple stocks.
- Example: Nifty 50 ETF includes the top 50 companies from various sectors, providing risk diversification.
- Helps reduce the impact of individual stock volatility.
✅ Tax Efficiency
- ETFs follow the same taxation rules as mutual funds.
- Short-Term Capital Gains (STCG): 15% tax
- Long-Term Capital Gains (LTCG): 10% tax on gains above ₹1 lakh
Drawbacks of Investing in ETFs
❌ Liquidity Issues
- Since ETFs are traded like stocks, you can only buy if there’s a seller at the same price.
- Sometimes, there is a significant price difference between buyers and sellers.
- This can create difficulties in executing trades smoothly.
❌ Performance Limitation
- ETFs track the index and cannot outperform it.
- If you are looking for higher returns than the market, actively managed mutual funds may be a better option.