WHAT IS EXCHANGE TRADED FUNDS?
Exchange traded funds hold a portfolio of securities that replicates an index and are listed and traded on stock exchanges. At least 95% of the total assets should be in securities represented in the index being tracked. The return and risk on ETF are directly related to the underlying asset or index.
BENEFITS OF ETF
1. Cost Efficient: Because ETFs are not managed by big fund managers, they have minimal expense ratios making them affordable. Most mutual fund requires minimum investment which act as hurdle for small investors but in the case of ETF the investor can purchase as little as one share of ETF.
2. Flexible investment portfolio: An ETF can own hundreds or thousands of stocks across various industries, or it could be isolated to one particular industry or sector. Some funds focus on Indian indices like Nifty50 while others have a global outlook.
3. Tax Advantage: Unlike a traditional mutual funds which attracts Capital Gain tax, ETF are tax efficient. In mutual funds, managers are forced to sell the share and have capital gain pay-outs at the year end in order to meet redemptions. ETF minimizes capital gain tax as they ETFs are redeemed in stock rather than cash. Therefore, it is not treated for tax liability.
4. Liquidity: ETFs offer anytime liquidity through the exchanges. Whereas mutual funds are only priced at the end of the day, ETFs can be traded at the exchanges as per the flexibility of investor.
