Every individual has their own financial goal. As per their goal and risk-taking ability, they decide their investment options. However, 2020 tells a different story.
Pandemic has affected all the sectors be it medical, industrial, or financial. 2020 has been financially very challenging and the new year is also not going to solve the problem anytime soon. This does not leave the scope of planning for long term financial goals in 2021. And to add, interest rates for long term investments are affected too.
Considering this, investing in Exchange Traded Funds (ETFs) would be a better option for financially safe and better 2021.
Exchange-Traded Funds (ETFs) are popular investment options globally. And it is best for anyone looking for a diversified approach and better return.
What are Exchange Traded Funds (ETFs)?
It is a type of security that involves a collection of securities that is bought or sold through a brokerage firm on the stock exchange. ETFs are very much similar to mutual funds. The only difference is that ETFs can be traded any time during the day, however, mutual funds can be traded only at the end of the day.
ETFs come with various advantages if we have a look at them in 2021:
- Lower Management Fees
ETFs are managed passively and thus have a lower expense ratio whereas funds that are managed actively have a higher expense ratio. The Management fee is lower for ETFs if we compare them to mutual funds. Also, commission fees will be less as there is only one transaction per trade which avoids accumulation of commission.
2. No Minimum Investment
You need to invest a minimum amount every month in mutual funds. In ETFs you can buy the type of shares you want.
3. Flexible Trading
ETFs are traded throughout the day and sold at re; time prices. On the other hand, a mutual fund is based on day end trading prices.
4. Tax-Friendly investment
ETFs are more tax-efficient than any other mutual fund. However, both ETFs and mutual are subject to capital gain tax and taxation of dividend income. But ETFs are structured in such a manner that taxes are minimized and the ultimate tax bill is less than any other mutual fund holder.
5. Sold short and bought on margin
ETFs trade like a stock, so investors can use them in selling short and buying margin.
6. Liquid Fund
ETFs can be traded throughout the day and frequently too. On an average day, millions of ETFs exchange hands, and this liquidity allow investors to jump in or out of the position.
7. Simple and Easy
ETFs are simple and easy to understand. You, being a good investor, should always be clear with your investment product. And ETF will help you and ease your understanding of investments.
Wrap Up
ETFs are good to go option in 2021 considering the market situation and financial health of an individual. It is a good way to build a portfolio or gain exposure. It has many advantages over mutual funds. ETFs are traded throughout the day.
It has its disadvantages too. You should always lookout for the most important points such as
1. Your investment strategy should be clear when investing in ETFs.
2. Low expense ratio and tracking errors are the two important points that should be considered.
3. How liquid your ETF is, makes a lot of difference. In some cases, the volume might be high but might not be liquid.
4. Demat and trading accounts are compulsory for investing in ETFs.
By now, you are aware of ETFs. If you are willing to invest in a particular sector and enjoy some return, don’t stop yourself. Invest in ETFs and be financially secured.
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