Why ETFs Should Be Part Of A Smart, Diversified Portfolio

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Mutual funds are a great way to build wealth as long as investors understand their risk profile and have a reasonably long-term horizon. In a mutual fund, the fund manager picks stocks based on the objective which is laid out in the scheme information document. An Exchange Traded Fund (ETF) works similarly, but instead of the fund manager buying and selling stocks regularly, ETFs are passive funds and aim to replicate the performance of their benchmark index. Another way to describe ETFs would be to say they are mutual funds that are listed and traded on stock exchanges just like shares.

ETFs offer investors an attractive and low-cost means to diversify their portfolio. An investor can buy even a single ETF share and through that gain exposure to the entire stock market. That means you could get an entire basket of Nifty 50 or Sensex 30 by buying one unit of that ETF. This is very useful for the common man since there is no compulsion for big spends to buy the entire index. ETFs provide investors ease of buying a complete basket of an index in a very simple manner on the exchange, like they would do in a stock.

Benefits of ETFs

ETFs are available widely across indexes and provide investors the opportunity to invest in many asset classes. ETFs are not just about diversified benchmark indices such as the Sensex 30 or Nifty 50. For instance, if you believe the Indian banking sector holds a lot of potential but can't make up your mind on which bank stock to invest in, you could consider investing in Axis Mutual Funds' Axis Banking ETF, which aims to provide returns that closely correspond to the total returns of the Nifty Bank Index. You could also invest in precious metals or government bonds through ETFs.

For investors who may not have the domain expertise to analyse and pick stocks and mutual funds as part of a portfolio of various asset classes, ETFs are a great tool. And speaking of portfolios, ETFs provide an opportunity for investors to buy into multiple kinds of financial assets and build a diversified portfolio for the long-term.

Also, as any wise investor will tell you, it is very important to ensure liquidity as part of a diversified investment portfolio. ETFs work great on this front since they do not have any lock-in period like some other types of mutual funds like ELSS, which come with a compulsory lock-in of three years. Investors can buy and sell ETFs on the markets anytime, just like shares. This means that investors could also gain from intraday market movements. On the other hand, mutual fund units do not trade on the stock exchanges. You can transact in mutual funds only at the day-end NAV declared by the fund house. Because of some of these reasons, ETFs are said to offer investors more flexibility when compared to mutual funds. However, do remember that mutual funds could also be necessary for a properly diversified portfolio. It’s not about choosing one or the other—but about understanding your goals, risk profile and objectives.

ETFs also have a lower expense ratio when it comes to ownership. The expense ratio of mutual funds is relatively higher because of active management on the part of the fund manager.

Smart strategies to start investing in ETFs

First, based on your risk profile, create an asset allocation plan. Remember to get this right because for some investors 80% of equity may seem right, but for others 40% may seem risky. Then decide on categories like debt, gold or sectors and how much you want where. Risk profile is a considered estimation of an investor's ability to tolerate loss on their investment. Every asset carries a different risk, and no investment can be entirely risk free.

So start planning now and widen your portfolio by investing in ETFs.

Disclaimers:

Past performance may or may not be sustained in future.

Axis Banking ETF offered by Axis Mutual Fund is not sponsored, endorsed, sold or promoted by NSE INDICES LIMITED (formerly known as India Index Services & Products Limited (IISL)). NSE INDICES LIMITED does not make any representation or warranty, express or implied (including warranties of merchantability or fitness for particular purpose or use) and disclaims all liability to the owners of Axis Banking ETF or any member of the public regarding the advisability of investing in securities generally or in the Axis Banking ETF linked to the NIFTY Bank Index or particularly in the ability of the NIFTY Bank Index to track general stock market performance in India. Please read the full Disclaimers in relation to the NIFTY Bank Index in the in the Offer Document / Prospectus / Information Statement.”

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