7 reasons why you should invest in Exchange Traded Funds

You have heard of ETF - Exchange Traded Funds. But you may not know exactly or how they could work for you. Once you understand the benefits of ETFs, you will see how they could be an exciting and smart way to help you to meet your financial goals, irrespective of your age, investment experience, or how much money you are looking to invest, etc.

An ETF, or an exchange traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. An ETF trades like a common stock on a stock exchange. ETFs typically have higher daily liquidity and lower fees than mutual funds, shares, making them an attractive alternative for individual investors.

The truth is that ETFs are an easy and low-cost way to invest across many stock and bond markets. But even as they've gained broad investor acceptance and lots of media attention, many people still have questions such as, "Why should I invest in ETFs?"

ETFs are investment funds that trade like a stock.

Here are some of the advantages that ETFs offer:
1. Quickly capture market opportunities — ETFs offer the same trading flexibility as stocks, meaning you know the price throughout the day and can easily buy and sell them during market hours.

2. Diversify your portfolio — There are many ETFs to fit your personal investment goals — whether it is building a diversified core across broad markets, investing in short- or medium-term opportunities, or targeting a specific purpose such as cushioning against jumpy markets. You can quickly achieve broad diversification with a single ETF that contains both stocks and bonds. Or choose from specific asset classes, sectors, etc.

3. Earn income — Many ETFs pay dividends, and some focus specifically on high-dividend-paying companies, which can be important if you are looking for potential regular income.

4. Manage risk — There is a growing array of ETFs that can help you hedge currency risk on foreign investments, reduce market volatility, or target specific "factors" such as growth-oriented companies.

5. Tax benefits - Because index ETFs are passively managed portfolios, they tend to offer greater tax benefits than regular mutual funds.

6. Transparency - As mentioned, ETFs are designed to replicate the performance of their underlying index or commodity. Investors always know exactly what they are buying and can see exactly what constitutes the ETF. The fees are also clearly laid out.

7. Growth potential — Rather than parking your money in low-interest cash accounts, you can invest in an ETF and still have the potential to earn market returns while you save for short-term goals or decide on specific stocks or bonds to buy. Of course, investing in ETFs comes with more risk and volatility than cash accounts. But you may also have better growth potential.

The writer is head, sales, Geojit BNP Paribas