Advantages and Disadvantages of Investing In ETF’s

ETF are more in talk these days but there may be many question in investors mind about how helpful ETF’s are to retail investors? So let me answer few of those questions about ETF’s and if you have more questions do post them in comments and I will be more than happy to answer them all.

Let us begin.

How ETF’s differ from Stock?

Exchange Traded funds are a lot different from stocks because they are more like fund and less like stock from an asset allocation perspective. Let us take a simple example. If you purchase a stock you buy into a single company but with fund you actually don’t buy one company shares but diversify the amount into the asset of various companies included in the fund.

Similarly in exchange traded funds you don’t invest in a single company but mainly into a group of companies. Of course there are some exception to the commodity ETF’s like Gold ETF’s where you invest only in Gold as a commodity.

How ETF’s are different from Mutual Funds and Index Funds?

Mutual fund NAV’s are updated once daily at the end of the day and so you cannot trade in mutual funds. By trade I mean buy and sell on the same day or may be in a day or two. ETF’s are traded in exchange like stocks and so you can buy any ETF and square off your position almost like a stock on the same day or in few days.

Again for buying mutual funds you need to be KYC Complaint but stocks and ETF can be bought and sold directly on the exchange from your trading account with your stockbroker during trading hours.

Final Thoughts

ETF’s in Indian market are still very new and so we don’t have many ETF’s to choose from. According to me this is one of the biggest disadvantage because you don’t have ETF’s for even major sectors of Indian market.

Over to you

If you have more questions, post them in comments below and I will be more than happy to answer them all.