Why ETFs are preferred by young investors

Manav is a young investor with Rs 50,000 to invest, taking his first step towards long-term wealth creation. He has been a keen student of financial markets and has some well-defined views on specific investments. He is optimistic about the Indian equity market and would like exposure to Indian companies as his core investment position. Apart from this, he would also like to take smaller positions to express two other views: bullish on gold and the US dollar, expecting both to move higher. He wants to use ETFs (Exchange Traded Funds) to take such exposures.

ETFs can contain stocks, bonds, commodities, foreign currency, money market instruments, or any other security. An ETF may also contain an index like the S& P 500 (United States), Nifty 50 (India) or any other index/benchmark of any country. An Index ETF is mainly a passive fund that allows investors to purchase a pool of securities in a single transaction. The objective here is to track the performance of a stock market index, like Nifty 50, Sensex, Nifty Bank etc. When an investor purchases a quantity of an index ETF, it means that the investor is purchasing a share of a portfolio that contains the securities of the underlying index. Sector ETFs enable investors to take bullish or bearish positions in specific sectors. Currency ETFs allow the investor to participate in currency markets without buying a specific currency. Gold ETFs track the bullion performance. When the gold price moves up, the value of the exchange-traded fund also rises and when the gold price goes down, the ETF loses its value.

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While such a portfolio would have required a much higher outlay of capital otherwise, Manav can build a portfolio of Rs 50,000 incorporating all views through the use of ETFs. Hence, ETFs have a number of features that can make these investment vehicles ideal for young investors with small amounts of capital outlay. For one, ETFs make it possible to build a diversified portfolio with relatively low investment amounts. In addition, ETFs trade throughout the day, providing ample liquidity and many have relatively low-cost structures, when compared to mutual funds.

Young and busy individuals who are either not familiar with the intricacies of the financial markets or may not have the time on a regular basis to track them would be well-served by using a passive management approach initially and gradually moving to a more active style as their investing knowledge increases.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)



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