Are you looking to diversify your investment portfolio? An effective way to do the same is investing in an exchange-traded fund. ETFs are beginner-friendly and convenient modes of investment that help you diversify your investment portfolio and mitigate the overall risk associated with your investment portfolio.
What are ETFs, and how do they function?
Exchange-traded funds are investments that trade on stock exchanges and help investors benefit from exposure to a specific domain in the market. ETFs also invest in commodities such as gold and bonds. ETFs also help you invest in a large number of securities at once, thereby helping you benefit from portfolio diversification. An ETF provider builds a basket of securities (including stocks, bonds, and commodities). You can buy a share in that basket exactly like you buy a company’s stock. This ETF can trade on an exchange throughout the day.
What are the advantages of investing in ETFs?
Here are the main advantages of investing in ETFs:
- ETFs help you diversify your investment portfolio: You can easily diversify your portfolio via an ETF investment. Investing in multiple sectors can help you gain exposure to a diverse range of sectors. Furthermore, investing in Gold ETFs can help you diversify your portfolio further. ETFs help you mitigate overall portfolio risk by helping you benefit from this diversification.
- They can be traded on stock exchanges like stocks: This is one of the most popular and characteristic advantages of ETF investments. Like stocks, you can trade them on stock exchanges. You can devise several investment strategies to grow your returns in the long run thanks to this feature.
- They generally charge lower fees from investors: ETFs charge a lower expense ratio from investors when compared to certain mutual fund categories. This is one of the two key features that makes ETF investments affordable.
- ETFs often help you buy the shares of a company at a cheaper price: ETF investments essentially offer discounts on the shares of certain sought-after companies. There is a very low chance of the share price of an ETF being higher or lower than those of its underlying shares.
What are the downsides of investing in an ETF?
You must consider the following disadvantages of ETF investments while investing in an ETF scheme:
- ETFs offer limited diversification: While diversification is truly one of the benefits of ETFs, there is a limit to how much you can diversify your portfolio using an ETF investment. In the case of certain sectors, a lack of exposure to small- and mid-cap companies could sideline opportunities for capital growth.
- Your ETF investment might cost higher than usual in certain cases: In certain cases, your ETF investment might also cost higher. You must check all the fees charged by an ETF before investing in it.
Is an ETF investment the right choice for you?
Exchange-traded funds or ETFs are efficient modes of investment for long term investors. If you are a first-time investor looking to learn more about a particular sector (e.g. – the sugar industry), you can invest in a sector-specific ETF and track your ETFs’ growth to learn more in the long term. The amount that it costs to own an ETF might sometimes be lower than the amount it costs you to buy individual stocks. These features make ETFs an ideal investment option even for first-time investors. If you are looking to invest for the long term, ETFs are ideal investment options for you.
Exchange-traded fund investments can help you consistently grow your investment returns by mitigating overall risks and helping you diversify your portfolio. Before investing in an ETF, you must research and compare other ETFs online to choose the best ETF scheme that suits your investment portfolio. Be sure to check the fees charged by the ETF before you invest in it. If you wish to invest in a sector-specific ETF, you must research that sector thoroughly and only then invest.
