Are you a young investor wondering how to start building wealth without the stress of picking individual stocks or managing high costs? Many beginners face difficulties in balancing risk, cost, and simplicity while starting their financial journey. Exchange-Traded Funds (ETFs) could be the solution here.
An ETF is a marketable security or passively managed investment avenue that tracks an index, bonds, sector, commodity, or basket of assets. Read on to learn why ETFs are the smartest way for young investors to begin their journey toward long-lasting wealth.
Cost-effectiveness
ETF investments are mostly passively managed and aim to replicate the performance of an index rather than outperform it. Hence, they don’t require the costly services of active fund managers. With lower fees, a larger portion of your money stays invested and allows compounding to work effectively over time. This cost efficiency makes ETFs an ideal choice for young investors who want to build long-term wealth systematically and affordably.
Diversification
Exchange traded funds can include several assets such as stocks, bonds, commodities, foreign currencies, money market instruments, or other securities. They can also track indices like the S&P 500 in the United States, Nifty 50 in India, or any other benchmark/index of other nations.
For example, a Nifty 50 ETF gives you access to the top 50 blue-chip companies listed on the National Stock Exchange (NSE) of India. This gives you instant diversification, reduces the risk of relying on a single stock, and aligns your portfolio with India’s economic growth, all at a low cost.
Arbitrage and covered option strategies
It is possible to use ETFs to hedge risks, arbitrage between cash and futures markets, and execute covered option strategies. They allow investors to manage risk effectively, capitalise on price differences, and generate additional income through options. This makes ETFs a useful tool for both institutional and individual investors seeking versatile investment strategies to boost portfolio returns while maintaining control over risk exposure.
High liquidity
Most ETFs offer high liquidity because they trade on stock exchanges just like individual stocks. This means you can buy or sell ETF units throughout the trading day at real-time market prices, unlike mutual funds, which are only priced at the end of the day. This intraday trading capability allows you to respond quickly to market movements and emerging opportunities. You can instantly convert your investment into cash when needed without major price fluctuation.
Flexible investment options
There are many types of ETFs to invest in, such as:
- Equity ETFs: Invest in stock market indices like Nifty 50 or focus on specific sectors. Equity ETFs can be categorised based on factors like market capitalisation (large-cap, mid-cap, small-cap, etc.), investment style (growth or value investing), strategy (passive or active management), and regional exposure (domestic or international markets).
- Fixed-income ETFs: Invest in bonds and treasuries to provide stability and income.
- Commodity ETFs: Follow commodities like gold or oil, which are ideal for inflation hedging.
- Currency ETFs: Allow investment in foreign currencies or currency baskets, which can benefit from currency value changes.
- REIT ETFs: Focus on real estate investments to deliver diversification in property markets.
- Multi-asset ETFs: Combine asset classes like stocks and bonds for balanced portfolios.
- Alternative ETFs: Use unique strategies like private equity or hedging.
- Sustainable ETFs: Invest based on Environmental, Social, and Governance (ESG) criteria.
For young investors, these ETFs offer countless options to build a balanced portfolio, manage risks, and explore growth opportunities locally and globally, even with less capital.
Key takeaways
Young investors who are new to the financial markets can significantly benefit from ETFs due to their simplicity, cost-effectiveness, and diversification. By investing in ETFs, such as the Nifty 50 in India, you get exposure to several assets without the complexities of stock picking. You can buy on margin, sell short, or hold ETFs for the long term, just like common stocks.
It is quite simple to invest in ETFs online. Simply research which ETFs to invest in, add funds to your demat account, and buy them without any hassles via online platforms or apps.
