Are Etfs A Good Option For The Long Term?

5 mins read

WHAT ARE ETFs?

ETFs are exchange-traded funds. It is very similar to mutual funds. It is a pooled type of investment operated just like mutual funds. ETFs track index sectors, commodities like gold, or any assets, but it is also traded on stock exchanges. You can buy and sell ETFs on the stock exchange.

ETF prices fluctuate all day long on the stock market depending on which ETF you are tracking and the movement in that sector.

ETF is known as exchange-traded funds because they are traded on exchange just like stocks, making them more cost-effective and liquid, unlike mutual funds. ETFs can also have many stocks of various industries, or they can restrict themselves in one sector.

For example, the Nifty ETF focuses on Nifty. And when the Nifty index moves upward, the price of the Nifty ETF will also go up. Similarly, a gold ETF, banking ETF, focuses on all banking stocks.

Most ETFs are open-ended, which means that they limit their investors. Any number of investors can buy and sell those ETFs. They are open-ended.

ETFs are very safe and are an excellent option for long-term investments. According to experts, ETFs are not that volatile and show a slight change in their prices compared to stocks and indices because they are diversified and pooled investments of many investors. Unlike very volatile stocks, ETFs are usually investments that deal in sectors, commodities, and together; when many stocks of that sector comprise an ETF, it moves slowly. It does not move 10-20% in a single day but indeed gives sizable returns in the long term.

Stock markets are an instrument that gives the best returns other than real estate, but an ETF is an option where you need not have an excellent knowledge of stocks, and you need to know the art of managing a portfolio. Passive investment in an ETF gives you stress-free great returns in the long term.

The ETF is advantageous as it is risk diversified, professionally managed, and cost-effective for its investors compared to other investment schemes such as mutual funds, stocks, etc.

ADVANTAGES OF ETF:

Diversified:

ETF diversifies your risk as you can invest in indices, stocks, commodities, and that too a pooled investment among various stocks of a particular sector.

Traded on exchange:

ETFs are traded during market hours, making them very liquid and easy for investors. They can keep track of everyday prices of an ETF; big players can also do intraday in an ETF. You can compare index prices and trade accordingly in ETF indices.

Low fees:

ETFs do not have expense ratio costs compared to mutual funds. You have to open a DEMAT account and pay your annual maintenance charges just like you do in stocks.

Dividends Reinvested:

When you receive dividends of the stocks in an ETF, they are reinvested immediately but not in an index ETF.

Tax-efficient:

ETFs are the most tax-efficient as compared to mutual funds. Passive trading in an ETF tends to give low capital gains tax when compared to trade-in actively trading ETFs.

Stability in prices:

The prices of ETFs is based on supply-demand and the current NAV. It is always stable and is priced according to the NAVs. It usually does not trade on heavy premiums and discounts.

Small amounts:

ETF can be purchased in small amounts compared to stocks. ETFs are not as expensive as stocks. It would help if you had a minimum of a thousand or lakhs of rupees to buy an ETF.

Sector investment:

If you are bullish on any sector or index, you can buy its ETF. ETF prices change when that sector grows.

DISADVANTAGES:

LOWER DIVIDEND:

Some ETFs give good dividends but not outstanding returns. Their yields may not be as high as a non-dividend ETF.

KILLS INTRADAY:

For long term investors who believed in holding an ETF for 11-15 years, their intraday gains are killed.

LESS VOLATILE:

ETFs are less volatile than stocks, so they do not give very high returns in a short period and similarly do not fall rigorously like stocks. ETFs are only for those who want slow and steady returns in the long term. For anybody expecting good returns overnight, an ETF is not a good option for you to invest in.

IS ETF GOOD FOR THE LONG TERM?

According to experts, it is an excellent investment for the long term. However, it gives you slow returns but steady returns too. You will find in the long term that it is hassle-free to invest in an ETF. Market crash or correction or downfall for any reason plunges your stocks by a reasonable amount, but it will not have a very much impact on the ETF. Similarly, the ETF prices will not go up very much when the market gives good returns. It will always be stable, but you will see the change after 5-6 years. You can buy gold ETF, Nifty ETF, banking ETF, energy sector ETF, and much more. You have to be disciplined and patient. Remember, patience is a virtue. The more patient you are with your investments, the more returns you will have in the long term.

ETFs are a good buy and hold an investment you should have in your portfolio conveniently.

Best ETF for long term investment is index ETFs as they definitely give great returns in the long term. The above mentioned ETFs are the best ETFs to invest in for the long term.

Happy investing!