ETFs are linked to the indices which are quite diversified and, hence, according to experts, they are less susceptible to extreme volatility. This is one of the main reasons why they are popular among investors. As ETFs can be bought or sold anytime during the market hours at a price close to the actual NAV of the scheme, it allows investors the opportunity to benefit from intraday movements as well.
Having said that, there are always risks involved with any kind of investment. Amit Dhakad, CEO and CTO of Market Pulse Technologies, says, “Young people/first-time investors must understand that no matter where they choose to invest, there is always some risk involved. If the stock market as a whole takes a turn for the worse, an investorâ€™s index ETFs will likely as well. But in general, index ETFs are much less risky than holding individual stocks. It provides efficient diversification.”
Note that, efficient diversification means that as an investor you should allocate your capital to a number of different investments to spread out the risk, rather than putting everything down on a single investment or stock. As ETFs track a basket of assets, investing in them provides diversification benefits.
Among the various advantages of investing in ETFs, the minimum capital requirement is one of them. Dhakad, of Pulse Technologies, says, “While the choices are many, the capital requirement can be a particular challenge for young investors, as they may have minimal savings to invest, to begin with; ETFâ€™s solve that. They trade for a fraction of the price of the underlying index, making them a great choice for beginners who are just getting their feet wet.” For instance, the Nifty index is at 13,000. But Index ETFâ€™s are available at 1/10 the cost or 1/100th cost. So, experts say one can invest starting with 1 unit of ETF with as little as Rs 1,300 or Rs 130 and get a piece of the action.
ETFs also cost-efficient as the expenses associated with ETFs are very low. Prateek Mehta, Co-founder of Scripbox says, “ETFs also generally entail a lower expense ratio than mutual funds, however, you will need to open and maintain a Demat account to transact in ETFs.” When compared to other products, this investment option is easy to trade, wherein you can buy and sell ETFs any time of the trading session through live NAV periodically throughout the day.
Nitin Kabadi, Head of ETF Business, ICICI Prudential AMC, says “One of the advantages of investing in ETFs is its transparency. Since ETF is index-based, the holdings are available in the public domain on a daily basis.” He further adds, “ETFs also provide trading flexibility. Because ETFs are traded like stocks, investors can place a variety of order types.”