Investments are made with the objective of generating short and long-term returns. Short-term returns are generally those generated within a year. Whereby long-term returns are of more than a year. A long-term investment plan prioritises building wealth over maximising short-term returns. When you invest your money with the goal of steadily increasing your wealth, you need to choose an investment vehicle that diversifies your portfolio and supports stable long-term returns.
ETFs offer benefits, including diversification, expert management, and liquidity at a fraction of the cost of alternative investing options. As a result, they are among the best-suggested investment vehicles for long-term investors. You can learn how Exchange Traded Funds (ETFs) can help you meet your long-term investing objectives by reading the article below.
What are ETFs, and How do They Work?
ETFs are collective investment vehicles that hold various assets, such as Indian and foreign stocks and bonds, commodities, etc. ETFs can be configured to track various financial instruments, from the price of a single commodity to a large and diverse collection of assets.
You should note the tracking error of an ETF as it helps you evaluate its efficiency in tracking the performance of its benchmark. Generally, a lower tracking error signifies that the ETF has closely matched the benchmark.
ETFs follow a specific index and attempt to match its performance. ETFs make investments in various asset classes, such as bonds, equities, and commodities. For instance, Kotak Nifty IT ETF is a stock ETF that purchases shares of all the companies that are part of the Nifty IT Index to mimic the performance of the index’s equities.
Are ETFs Good for the Long Term?
Investors could boost their wealth at a minimal cost by using ETFs to access different market indices, such as the Nifty and Sensex. The ETF helps you generate long-term wealth with the following benefits:
Diversification: A significant advantage of investing in ETFs is diversification. A variety of ETFs are available that differ mainly in their underlying assets, such as gold, stocks, or index funds. ETFs give you the option to reduce stock-specific risk by distributing investing risk across a number of securities.
Accessibility: ETFs tend to have very low minimum investment. As a result, you can start building a portfolio of ETFs with just a few hundred.
Convenient: ETF investing is practical because it lets you buy and sell anytime. ETFs can also be used for intraday trading. With ETFs, redemptions are not a concern (unlike with mutual funds), as market action results in unit transfers rather than changes to AUM.
Real-Time Trading: During trading hours, ETFs can be bought, sold, and traded intraday. ETF prices fluctuate during regular trading hours.
Liquidity: ETFs can be traded on the stock market like any other stock. The additional benefit is that, unlike mutual funds, which trade at the end of the day, you can trade, buy, and sell them during the day. Since ETFs permit intraday trading, you can rapidly convert your investments into cash for better liquidity.
Note: The above ETF data is on the basis of a 5-year CAGR as of October 05, 2023.
How to Create a Long-Term ETF Investment Strategy?
The below steps talk about creating a long-term ETF investment strategy:
Know your investment objectives, wealth-building aim, time horizon, risk tolerance, and the amount you want to invest every month, quarter, or year.
Choose an asset mix such as equities, bonds, gold, and sector ETFs.
Once your asset mix is prepared, all you are left to do is choose ETFs for your long-term investment plan.
To keep your asset mix consistent and to add or remove any ETF, track your ETFs frequently.
Benefits of ETFs
There are numerous benefits of investing in ETFs, a few of them are listed below:
ETFs provide low-cost benefits as it would be expensive for an investor to buy all the stocks in an ETF portfolio individually.
For every trade, brokers often charge a commission. To further cut costs for investors, some brokers even provide no-commission trading on a few inexpensive ETFs.
Risk management through diversification
Conclusion
ETFs facilitate long-term wealth growth by offering flexibility, transparency, diversity, and ease of purchasing and selling on stock markets like any other stock. ETF investing is not only appropriate for novice investors who are just beginning their financial journey, but it may also be a great long-term plan for investors.
FAQs
Should I invest in ETF for the long term?
ETF investing could help you grow money in the long run, thanks to the compounding power. They typically have lower costs than other types of investments. These benefits help you grow money over time.
How long should I hold an ETF for?
You can hold ETFs as long as you want. Allow compound interest to work for you over time. However, you should avoid selling ETFs when the market is down since you can miss out on the potential to gain money when the market recovers.
Can an ETF value go to zero?
Yes, if the ETF’s assets lose all of their value. However, this situation is very rare to happen as ETFs invest in multiple asset classes in order to diversify the portfolio in an efficient manner.
Are ETFs a good investment?
ETFs are viewed as low-risk investments since they are inexpensive and contain a variety of equities or other securities, improving diversification. In addition, ETFs are considered as good assets for creating a diversified portfolio.
Is ETF earning tax-free?
Earnings generated over ₹1 lakh from equity ETFs held for more than 1 year will be subject to Long-Term Capital Gains (LTCG) tax of 10%. However, short-term capital gains (STCG) are taxed at 15%.
ETFs offer benefits, including diversification, expert management, and liquidity at a fraction of the cost of alternative investing options. As a result, they are among the best-suggested investment vehicles for long-term investors.
ETFs are considered to be low-risk investments because they are low-cost and hold a basket of stocks or other securities, increasing diversification. For most individual investors, ETFs represent an ideal type of asset with which to build a diversified portfolio.
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Because of their wide array of holdings, ETFs provide the benefits of diversification, including lower risk and less volatility, which often makes a fund safer to own than an individual stock. An ETF's return depends on what it's invested in. An ETF's return is the weighted average of all its holdings.
For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.
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With their diversified portfolios and flexibility, ETFs offer exposure to a wide range of assets while mitigating risk. By implementing strategies such as asset allocation, sector rotation, and dividend investing, you can maximize returns and minimize risk in your retirement plan.
Bill Bengen's model allows you to take out 4% of your assets to live off in your first year of retirement. If you have $1 million, you would be able to take out $40,000. The first nuance that many investors often forget is that the model allows for inflation in each subsequent year's withdrawal.
So what does it mean to live off your dividends? If you invest in dividend-paying stocks, mutual funds, or ETFs, which provide distributions of stocks or cash to shareholders, over time, the cash generated by those dividend payments can supplement your income when you retire.
Typically, the issuer will give a minimum of 30 days' notice to allow investors to find an alternative ETF, or to alter their investment strategy. If you own ETF shares, you will receive cash equivalent to the value of your holding on the day of liquidation (not the value on the last day of trading).
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.
Both index funds and ETFs offer investors unique advantages and cater to different investment preferences. While index funds provide simplicity, stability, and cost-effectiveness for long-term investors, ETFs offer greater flexibility, intraday trading options, and potential for active management strategies.
The best time to buy ETFs is at regular intervals throughout your lifetime. ETFs are like savings accounts from back when savings accounts actually paid you interest. Think back to a time when you (or your parents!) used to invest in your future by putting money into a savings account.
The choice comes down to what you value most. If you prefer the flexibility of trading intraday and favor lower expense ratios in most instances, go with ETFs. If you worry about the impact of commissions and spreads, go with mutual funds.
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