Exchange Traded Funds(ETFs) offer several advantages over regular mutual funds. They’re a great investment vehicle for first time equity investors who are worried about losing money in mutual funds. Here’s why?
• ETFs mimic a popular index, carry all securities held in the index and offer greater diversification over mutual funds • The mimicking strategy (passive fund management) results in fewer transactions than actively managed funds that frequently buy or sell securities from their portfolio to show higher return than their benchmark. This churn in actively managed mutual funds leads to higher tax incidence since the funds have to pay STT(securities Transaction Tax) and capital gains tax while buying or selling securities within their portfolio. Thus ETFs are more tax efficient than other mutual funds.
• ETFs also have lower expense ratio compared to actively managed mutual funds which must employ highly skilled fund managers for generating active returns i.e returns higher than their benchmark index.
• ETFs offer more convenience and liquidity to investors since they are listed on exchanges and trade like stocks. Investors can transact in ETF funds any time during market hours at real time prices unlike actively managed mutual funds where NAV is computed only once a day after the market closes. If you are unsure about equity investing, ETFs are your starting point!