Updated on March 5, 2023
Exchange Traded Funds or ETFs are investment vehicles, in which money is pooled like a mutual fund and invested in multiple assets like shares, bonds and gold. In structure, ETFs are similar to index mutual funds. A primary difference between mutual funds and ETFs is that ETFs trade like stocks on stock exchanges. Hence, investors can buy and sell ETFs on the stock exchange as per convenience. ETFs are different from other products and this makes them an attractive investment option.
Features of ETFs
Features of ETFs are:
1. A Demat account is needed for investing/trading in Exchange Traded Funds.
2. Apart from providing greater diversification, ETFs provide easy liquidity.
3. ETFs do not come with any lock-in period which gives investors the privilege of selling and withdrawing their holdings during market hours.
4. ETFs don’t charge commission or management fees, so most of an investor’s money goes into the fund.
Benefits of ETFs
Benefits of ETFs are:
a) Lowers the risk-ETFs give investors the benefit of investing in equity of a variety of companies. Poor performance of one stock can be offset by extraordinary growth in other stocks, thus reducing risk.
b) Cost effectiveness-Since they are not actively managed, the expense ratios for ETFs is comparatively low.
c) Single transaction advantage-ETFs are single and independent transactions similar to owning a mini portfolio. This helps investors to track ETF performance easily.
d) Flexibility-ETFs can be traded on a daily basis and can be bought and sold at a profit within a trading day during market hours.