ETFs hold an edge over traditional open-ended mutual funds. They are low-risk investments due to their low price and offer exposure to an index or basket of securities and stocks for great diversification. All types of investors with long-term and short-term goals may use it to their advantage. ETFs in India are traded intra-day like stocks and are passively managed. They are a relatively new entrant in the investment landscape yet have quickly taken over traditional funds in terms of transparency, tax efficiency and trading flexibility.
They can be bought and sold like stocks while mutual funds can only be purchased at the end of trading days. Having a clear idea of the benefits beforehand can help make an informed choice and navigate the risks. Here’s a glimpse into how ETFs overshadow the traditional open-ended funds in different aspects.
ETFs are able to provide investors with an insight into different market segments as per specific styles, industries, sectors and countries. So, it can help you build a diversified portfolio. ETFs are more like stocks according to their trading manner but are similar to other broad investments in their price movements. The cost of spreading the portfolio into multiple assets is lower than traditional funds which makes it more convenient. Exchange- traded funds in India can also be an ideal choice if you are building a portfolio of index funds.
Mutual funds incur more capital gain taxes in terms of structural differences. This is passed on to the investor throughout the tenure of investment. On the other hand, the taxes for ETFs are payable only when they are sold by the investor. Further, mutual funds are required to distribute the capital gains to the shareholders in case the manager sells securities and earns profits. The distribution amount is taxable even if the fund goes down in overall value. It is a good idea to consult financial advisors and learn about the tax properties of ETFs in India to be able to save a significant amount.
Low Operating Costs
The expense ratio is much lower than that of open-ended mutual funds. This is because they are passively managed and the client service-related expenses are sent to the brokerage firms that hold the securities in customer accounts. ETFs are affordable in terms of custody costs, return forecasting, marketing expenses and distribution. This ensures better returns and helps to achieve your goals tied to these funds. They are also quite cost-friendly in the areas of notifications, monthly statements and transfers. Further, there are no redemption fees unlike that of mutual funds. So, check the list of ETFs in India and pick the one that best serves you.
ETFs in India are quite flexible and help gain instant exposure to equity markets. They can easily avoid dividend taxation due to the unique structure and let you make the most of your investment and reach different types of goals in the long and short terms. It is ideal for individuals with little experience or understanding of the investment arena.