Currently, investing in equities is not the only option for our money to give us good returns. There are other products that can complement the actions and even replace them. The ETFs are one of the investment products that is gaining popularity in recent years. ETF stands for Exchange Traded Funds.
We can even consider ETFs that have been positioned as an alternative to equities for investors. That can create a boom and therefore passive management of investments.
We can ask ourselves: Why are ETFs more recommendable than equities?
ETFs (Exchange Traded Funds)
ETF comes from the term “Exchange Traded Fund”, which is proved to be beneficial for investors. In other words, they are investment funds, but with certain characteristics different from the traditional investment funds that we know.
ETFs work differently from traditional funds, and are more similar to equities, but these are called exchange-traded funds. The price of ETFs varies according to real time, like that of an equity exchange, you can buy and sell at any time of the day at the price set by the market at that time.
How ETF Funds work:
The returns of the ETF are dependent on the index movement.
ETF Funds are listed on the stock market and if you have a demat and trading account, then you can easily buy ETF Funds.
The return of ETF funds cannot be expected in the fix because the return of the ETF is dependent on the high index price fluctuations like BSE exchange.
ETF Funds are first launched in the market as NFO (New Fund Offer), after which it is listed in the stock market.
In ETFs, money is raised from investors to invest in many currencies, government bonds and other assets.
Inshort, ETF works for more returns from the market that can be used to serve good returns to their investors.
What are the differences between ETFs and Equities?
If ETFs trade like equity, we may wonder how they differ from equities. The difference is that ETFs are investment funds and are made up of different baskets of financial products.
ETFs are made up of baskets of products, that means, when you buy a share in equity, you are investing in a specific company, but through ETFs you are investing in several companies at the same time.
What type of taxation applies to ETFs?
ETFs are usually taxed as an equity should. That is, as the capital gain or loss that must be taxed each time ETFs are bought or sold.
Advantages of Exchange Traded Funds over direct equity
The differences between ETFs and equities also mark the advantages over investing in the equity market. These are some key highlights of ETFs:
- Greater diversification at a lower cost. In other words, by investing in a basket of equities, commodities or assets, ETFs are already a diversified product in themselves.
- There are more investment alternatives. In other words, ETFs allow you to invest in assets. That is, there are ETFs on gold, oil and other assets with similar characteristics.
- More advantageous taxation for ETFs that are not in Indian territory. In other words, foreign ETFs can enjoy tax deferral. Therefore, if you transfer money from one ETF to another it does not have to be taxed at that time. You will have savings between 19 and 23 percent of the profit.
ETFs are versatile investment products that are similar to other investments but serve us a passive management and indexed portfolios.
1. Diversification.
As I have already mentioned, when you buy shares in an ETF you “buy” an entire stock index. So if you choose to invest in ETFs, you buy shares of 35 companies at a stroke, obtaining a spectacular diversification in terms of assets automatically.
On the other hand, ETFs also allow you to invest in any country in a very simple way, so they also allow you to diversify geographically. With a well-built portfolio your diversification will be maximum and chances of good returns will increase.
2. Low commissions
Despite being very similar to equity funds, ETFs charge very low management fees, even being able to find ETFs that charge a fee of 0.10% per year on your money.
Costs are critical in determining profitability, so this is a clear advantage of exchange-traded funds over direct equity investments.
3.High liquidity
Like stocks, ETFs are highly liquid, especially if they are tied to a reliable primary market.
4. They are very easy to acquire
There are many different ETFs and most of them can be bought from your bank easily.
It is as easy to buy ETFs as stocks or equity.
Of course, before buying you always have to be sure of the commission that the broker takes.
The higher your commission, the lower the profitability, so it is a fundamental factor.
5. There is no minimum investment amount
Some funds require a minimum amount of money to invest, but not in ETFs.
Of course, buying an ETF implies a purchase commission, so if you buy too low, the charges will seem to be excessive. The only condition will be to buy at least one huge asset, so the commission fee of the ETF will be nominal.
The genius of investment in the United States and in the world, Warren Buffett, has made it clear many times that he recommends his wife to invest all her money in ETFs when he dies, for its simplicity and profitability. This clearly states the importance of ETFs over direct equities in terms of simplicity.
