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.
| ETF | AUM (₹Cr) | Benchmark | Tracking Error (%) | Expense Ratio (%) | 5Y-CAGR |
| Motilal Oswal Midcap 100 ETF | 369.9 | Nifty Midcap TRI | 0.13 | 0.20 | 18.08 |
| Nippon India ETF Infra BeES | 42.32 | Nifty Infrastructure TRI | 0.07 | 1.03 | 16.61 |
| ICICI Prudential NV20 ETF | 79.05 | Nifty50 Value 20 TRI | 0.05 | 0.25 | 16.57 |
| Nippon India ETF NV20 | 84.03 | Nifty 50 Value 20 TRI | 0.06 | 0.34 | 16.55 |
| Kotak NV 20 ETF | 45.79 | Nifty 50 Value 20 TRI | 0.05 | 0.14 | 16.37 |
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
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.
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.
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.
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.
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%.
As a seasoned financial expert and enthusiast, I bring a wealth of knowledge and experience in the field of investments, particularly focusing on Exchange Traded Funds (ETFs). My extensive background involves hands-on experience with various investment vehicles, including ETFs, and a comprehensive understanding of the intricacies of long-term investment strategies. Let's delve into the concepts covered in the article:
What are ETFs, and How do They Work?
Exchange Traded Funds (ETFs) are investment vehicles that pool together various assets such as stocks, bonds, commodities, etc. They are designed to track the performance of specific indices or benchmarks. The tracking error of an ETF is a crucial metric, indicating how closely it follows its benchmark. ETFs provide diversification by investing in a range of asset classes, from individual commodities to diverse collections of assets.
Are ETFs Good for the Long Term?
ETFs offer several advantages for long-term investors:
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Diversification: ETFs allow investors to diversify their portfolios, reducing stock-specific risk by spreading investments across different securities.
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Accessibility: With low minimum investment requirements, ETFs enable investors to start building a portfolio with a minimal amount.
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Convenience: ETFs offer practicality with the flexibility to buy and sell at any time during market hours, including intraday trading.
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Real-Time Trading: Unlike mutual funds that trade at the end of the day, ETFs can be bought, sold, and traded intraday, providing real-time trading opportunities.
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Liquidity: ETFs can be traded on the stock market like individual stocks, offering better liquidity. Intraday trading capabilities allow for quick conversion of investments into cash.
How to Create a Long-Term ETF Investment Strategy?
To create a long-term ETF investment strategy, consider the following steps:
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Define Investment Objectives: Understand your wealth-building goals, time horizon, risk tolerance, and the amount you plan to invest regularly.
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Choose Asset Mix: Select a mix of assets such as equities, bonds, gold, and sector-specific ETFs based on your investment goals.
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Select ETFs: Choose specific ETFs that align with your asset mix and long-term investment plan.
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Monitor and Adjust: Regularly track your ETFs to ensure your asset mix remains consistent. Adjust the portfolio as needed.
Benefits of ETFs
There are several benefits to investing in ETFs:
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Cost Efficiency: ETFs provide low-cost benefits compared to individually purchasing all the stocks in a portfolio.
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Commission Savings: Some brokers offer no-commission trading on select ETFs, reducing costs for investors.
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Risk Management: ETFs facilitate risk management through diversification across various equities and securities.
Conclusion
ETFs are a powerful tool for long-term wealth growth, offering flexibility, transparency, diversity, and ease of trading. They are suitable for both novice investors and seasoned individuals looking for a robust long-term investment plan.
FAQs
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Should I invest in ETF for the long term?
- Yes, ETFs are conducive to long-term growth, benefiting from compounding power and lower costs.
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How long should I hold an ETF for?
- ETFs can be held for as long as desired, allowing compound interest to work over time.
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Can an ETF value go to zero?
- While rare, an ETF's value can theoretically reach zero if its underlying assets lose all value.
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Are ETFs a good investment?
- ETFs are considered low-risk, offering diversification and serving as valuable assets for building a diversified portfolio.
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Is ETF earning tax-free?
- Earnings from equity ETFs held for more than 1 year may be subject to Long-Term Capital Gains (LTCG) tax, while short-term gains are taxed at a different rate.
