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Investing in Exchange-Traded Funds (ETFs): Diversification and Convenience for Young Investors

If you’ve been a diligent Deciml reader (and we hope you have!), then you’ll have seen that often when we talk about diversification, we talk about exploring the scope for Exchange Traded Funds in India (ETFs).

We love introducing you to new instruments of investing! And today, we’re excited to bring ETFs front and center! 

In this article, you will not only figure out the meaning of Exchange Traded Funds, but you’ll also get a fair idea about why this is becoming a popular instrument of investing for young Indians!

Let’s start with the most basic question – What are Exchange Traded Funds (ETF)?

The world of investing is not static – it is constantly evolving – which means so is the opportunity for growth! One such evolution that has gained significant traction in the Indian finance market is investing in Exchange-Traded Funds.

ETFs equip investors with the power of diversification and convenience – two important parts of the investment journey – making them an attractive choice for you if you are seeking to build a solid foundation for your financial portfolios.

Exchange Traded Funds are a pool of financial instruments including commodities, stocks, and bonds which an investor can allocate funds toward. So, investing in one ETF can mean you are investing in all of its underlying instruments, rather than just one type.

You can trade in Exchange Traded Funds like you would any stock on the stock market. This is different from how you would trade in mutual funds. While a mutual fund is listed under a fund house, and can only be traded through said house, you can buy and sell ETF shares in real-time during market hours, similar to how you would trade stocks.

Benefits of Exchange Traded Funds

When you get into the nitty-gritty of it, you will find many benefits of Exchange Traded Funds. But to get you as hyped up about ETFs as we are, we have identified three key benefits that you can focus on while considering investing in these funds. Here are three picks – 

Diversification: The Power of Spreading Out Risk – Diversification is a key principle of investing (we’re big fans!), especially for those who are just beginning their journey in the world of finance. And as we’ve said a hundred times before – diversifying your portfolios can help you mitigate some risk and effectively reduce your exposure to the volatility of companies and the market.

This is where Exchange Traded Funds truly shine! ETFs allow you to expand your horizons across various asset classes, sectors, and even geographic regions through a single investment! For instance, a technology-focused ETF could provide exposure to a basket of technology companies, while an international ETF could grant access to foreign markets. We keep saying diversity is important because this diversity is what allows young investors to create a robust, balanced, and resilient financial portfolio that can bear some of the brunt of unpredictable market fluctuations. 

In addition, Exchange Traded Funds often offer the advantage of fractional shares. What does this mean? This means that even with a modest initial investment, you can purchase fractional units of ETFs, granting you access to assets that might otherwise be out of reach due to high share prices. This sort of fractional ownership will allow you to further diversify. How? By enabling you to spread your investments across multiple ETFs and asset classes.

Convenience: The Power of Flexibility – Look, we get it – you are juggling busy schedules and responsibilities, and convenience is a paramount consideration when choosing investment options. Exchange Traded Funds address this need by offering a level of ease and accessibility that traditional investing methods often lack.

With ETFs, you can participate in the market without needing to perform extensive research or analysis of individual stocks. This is especially advantageous for you if you are new to investing or lack the time to closely track market developments, regularly.

Additionally, Exchange Traded Funds make for a new and exciting avenue for you to engage in long-term investing (which we’re also big fans of here at Deciml!). Through automatic investment plans, you can set up recurring contributions to your chosen ETFs. This will propel you into fostering a disciplined saving and investment habit (which is paramount for wealth creation!). This approach aligns well with the preferences of young investors who seek seamless and streamlined solutions that work in tandem with their daily routines.

Cost-Efficiency: The Power of Maximizing Returns – Costs play a critical role in investment outcomes, especially if you are a young investor who is conscious of optimizing your returns. Exchange Traded Funds are well-regarded for their cost efficiency, primarily due to their passive investment approach. 

Unlike actively managed mutual funds, where fund managers make frequent trades and decisions that can result in higher management fees, ETFs aim to replicate the performance of a specific index or sector. This passive strategy results in lower expenses, allowing you to keep a larger portion of your investment gains.  

The cumulative effect of reduced fees over time can contribute significantly to the overall growth of a young investor’s portfolio. Additionally, the accessibility of ETFs with low or no minimum investment requirements is a godsend for young investors who may be working with limited initial capital (remember – the important thing is to start and be consistent!). This accessibility ultimately empowers you to enter the investment world and start building your wealth without facing the financial barriers that often accompany traditional investment options.

And there you have it – three empowering benefits of Exchange Traded Funds, that can add a whole lot of value to your portfolio, facilitating the scope for unbridled financial growth!

In a rapidly changing digital landscape, financial literacy and planning are critical skills. As a means to that end, ETFs offer you a gateway to meaningful participation in the market. The ability to gain exposure to a diversified range of assets, execute trades in real time, and manage investments conveniently caters to the preferences and needs of young investors seeking to secure their financial futures.

FAQs

  • What are Exchange-Traded Funds?

Exchange Traded Funds represent a unique blend of stocks and mutual funds, designed to provide investors with exposure to a diversified portfolio of assets. The fundamental concept of these funds is to mimic the performance of a specific market index or sector; so your investments are then based on the performance of that entire sector. 

  • What are mid-cap Exchange Traded Funds?

A mid-cap Exchange Traded Fund is a pooled investment, like a mutual fund, that focuses on companies that have a market capitalization in the middle range of listed stocks. 

  • How to buy gold Exchange Traded Funds?

Gold ETFs are listed and traded on the National Stock Exchange of India (NSE) and Bombay Stock Exchange Ltd. (BSE) like a stock of any company. Gold ETFs trade on the cash segment of BSE & NSE, like any other company stock, and can be bought and sold continuously at market prices. (Source: AMFI)

  • Do Exchange Traded Funds have liquidity?

Typically, ETFs have higher daily liquidity compared to mutual funds.

  • Are ETFs cost-effective?

Exchange Traded Funds are well-regarded for their cost efficiency, primarily due to their passive investment approach. 

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