Investing in mutual funds needs patience. If you want to witness your investments turn into a decent corpus, you may have to give them some time to grow. A lot of people fear investing in mutual funds because they feel that they will lose all their investment. But this is not true at all. If you are effective with financial planning and know your financial goals, investing may become a lot easier than anticipated. The investment market is flooded with numerous investment schemes to choose from. Each investment scheme has a unique investment objective and you may have to consider one that suits your expectations. If you are good with money management and know your short term and long term goals, you may be able to implement an investment strategy and spread your finances across investments as per your priorities.

But before you go ahead and make the actual investment, it is better that you determine your risk appetite. A risk appetite an individual’s ability to risk their money with an investment scheme with the hope of making some capital appreciation. There are investment schemes that allocate their assets depending on their risk profile. Also, it helps investors in distinguishing schemes depending on their risk profile. If you are someone with zero risk appetite, conservative investment schemes might do the job for you. But if you are someone who doesn’t mind taking added risk and investing in tools that have a high risk rewards ratio, you may consider investing in mutual funds.

But what exactly are mutual funds?

SEBI, the regulatory body of mutual funds here in India describe them as a, “Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced.”

Mutual funds are funds that AMCs collect from investors sharing a common investment objective and invest this pool of funds collectively across the Indian economy. These are professionally managed funds that depend on the performance of their underlying assets and the performance of sectors / industries in which they invest. The money is invested based on the scheme’s objective, risk profile, etc. in equity and other money market instruments like debt, government securities, corporate bonds, treasury bills, commercial papers, certificates of deposits, etc.

Mutual funds are majorly categorized as equity, debt, solution oriented, hybrid, ETF, etc. In the recent past, exchange traded funds have gained popularity here in India. A of investors are considering them as an investment option. Today we are going to focus on ETFs (exchange traded funds) and try to find out why one might consider adding them to his or her investment portfolio.

What are exchange traded funds?

According to SEBI, an exchange traded fund is, “an open ended scheme which replicates/tracks the particular index. Of the total assets, this fund must invest a minimum of 95 per cent in securities of a particular index (which is being replicated or tracked).” Exchange traded funds follow their underlying index, which could be anything like SENSEX, NIFTY 50, gold, etc.

Why should one consider adding exchange traded funds to your investment portfolio?

There are a lot of reasons that make exchange traded funds stand out in comparison to other investment schemes. Here are some of the reasons why you may adding ETFs to your investment portfolio:

ETFs are passively managed: Each fund has an expense ratio which investors have to hear for owning these funds. The expense ratio of actively managed funds is relatively higher because these funds involve active management of the fund manager. ETFs on the other hand are designed to track their underlying index with minimal tracking error. Hence there is no active participation involved, the expense ratio of owning these funds is low.

ETFs offer liquidity: One needs to give their investment portfolio some liquidity and by adding ETFs to their portfolio, they might be able to do so. ETFs do not have any lock in period like some other mutual funds like ELSS which come with a compulsory lock in of three years. When there is no lock in, investors are not obligated to hold on to their ETF investments and can redeem their units according to their convenience. This offers your investment portfolio liquidity and hence adding ETFs to your folio might be a favorable thing to do.

Now that you know some of the perks of adding ETFs to your investment portfolio, plan on investing? But before you invest in any scheme, make sure that you do some basic research of the fund. Make sure that you invest in a fund that has a proven track record. And if you are completely new to investing, it is better you seek the help of a financial advisor.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.