What are the Advantages of Exchange-Traded Funds?

ETFs help you diversify your portfolio by pooling your money and purchasing a variety of financial securities like stocks, bonds, commodities, and currencies. The key benefit of exchange-traded funds (ETFs) is that they combine the stability of mutual funds and the flexibility of stocks. If you want long-term growth, you can definitely invest in ETFs.

This blog underlines the key advantages of exchange-traded funds investment and what you must consider while investing in ETFs.

What is an ETF?

ETFs are a type of security that represents a mutual fund which can be traded on an exchange just like stocks. Additionally, they put the money in different asset classes like mutual funds. Before exploring the benefits, you must know what ETFs are.

Based on the asset type you have chosen for your portfolio, ETFs can be equity-oriented, debt-oriented or hybrid funds.

As per the Economic Times, gold ETFs have generated 47% average returns in 2025 as of September 29, 2025.

What are the Advantages of ETFs?

One of the key advantages of ETFs is that it allows the benefits of both stocks and mutual funds. Here are the other advantages:

1. Affordability

   ETFs have lower expense ratios in contrast to actively managed mutual funds. You do not have to pay any entry or exit loads in most cases. Since they follow the passive style of investment, the costs associated with active fund management are eliminated.

2. Liquidity

   Liquidity is one of the key benefits of ETF funds. You can easily trade ETFs on stock exchanges, just like you invest in regular equity stocks. This means you can buy and sell ETFs at any time during business hours. However, some ETFs are less liquid than others, depending on the demand.

3. Transparency

   ETFs are very transparent, as most ETFs publish their holdings reports daily. This helps you see exactly in what assets the ETF invests and how it distributes its holdings. This crucial insight helps you make informed decisions about your investments.

4. Diversification

   Since ETFs can track indices, you can diversify your portfolio very easily by investing in them. Each index includes different stocks and other securities. Hence, ETFs have a combination of different assets in their portfolios. However, achieving the same diversification by buying stocks can be tricky and costly, too.

5. Accessibility

   Before purchasing ETFs, you do not have to worry about minimum investment limits. This helps you to access ETFs with varying budgets and financial capabilities. Additionally, since ETFs track different types of indices, you can find an ETF as per your risk appetite.

6. Tax Benefits

   Compared to mutual funds, ETFs are more tax-efficient because of their unique structure. You may incur capital gains tax only when you sell ETFs. However, in mutual funds, redemptions in the fund can result in a tax burden.

7. Wide Range Investment Options

   There is a wide range of ETFs available that cater to different investment goals and risk appetites. You can choose ETFs that are based on different indices, different sectors, and investment strategies. This extensive choice helps you tailor your investment portfolio to your financial goals and risk tolerance.

8. Passive Management

   The passive nature is another advantage of exchange-traded funds. You can passively manage most of the ETFs. This means they can track an index instead of depending on active fund managers. This leads to lower management fees and minimises human error while choosing stocks.

Who Should Invest in Exchange-Traded Funds?

Everyone with a Demat or trading account can invest in ETFs. Now that you know the key advantages of exchange-traded funds, check who should invest in ETFs. ETFs can be beneficial for people who:

1. Need liquid assets for short-term investments
2. Want market exposure without actively managing a portfolio
3. Want passive management and tax efficiency
4. Are looking for steady and long-term capital appreciation from compounding potential
5. Are cost-conscious investors
6. Want to gain exposure from multiple industries, indices, or regions via a single ETF investment

You can download the PL Capital Group – Prabhudas Lilladher application to invest in ETFs by opening a Demat account for free.

Things to Consider When Investing in ETFs

Before investing in ETFs, you must consider the following things:

• Spreads

You must pay a spread when buying or selling ETFs. A spread is the difference between the maximum price you pay to purchase a security and the minimum price at which you can sell it. A higher spread means higher costs.

• Commission

Sometimes, brokerage companies charge a commission when you buy or sell an ETF. However, these commissions add up and become a high cost. Try to check what your broker charges as commission before trading.

• Discounts and Premiums

You buy and sell ETFs at market prices, instead of at their net asset value (NAV) like mutual funds. Consequently, you can pay more for an ETF than the actual value of its underlying assets, which is a premium or sell an ETF for less than the value of its holdings, which is a discount.

• Volatility

The market volatility can affect ETF spreads. Higher market volatility can lead to wider bid-ask spreads and also affect premiums or discounts to NAVs. This results in higher costs for you.

• Complexity

Sometimes ETFs can be complex or lack diversification due to some particular strategies or holdings. You must carefully analyse the features, benefits, risks, and performance of an ETF before investing in it.

• Liquidity

You can determine an ETF’s liquidity by the number of market makers who want to buy or sell the ETF in the entire trading day. Higher liquidity typically means narrower bid-ask spreads, while lower liquidity ETFs mean wider spreads.

The Future of ETF Investments

It is also essential to discuss the future of ETF investments while understanding its advantages. The future of the Indian ETF market is promising because of increasing investor participation and regulatory support:

1. The increasing awareness of low-cost and transparent investing helps ETFs to become a crucial part of retail and institutional portfolios.
2. The passive investment strategies led the investors shift from mutual funds to ETFs for index-based exposure.
3. Additionally, the rise of thematic, sectoral, and international ETFs will allow investors to diversify across different industries and regions.
4. The advanced technology and digital investment platforms are making ETF access, real-time tracking and transactions easier.

As financial literacy is improving in India, ETFs can become a primary investment choice for both retail and institutional investors who seek transparency and long-term growth potential.

Final Thought

You must thoroughly understand the above advantages of exchange-traded funds before investing in them. Some of them are diversification, lower expenses, and liquidity. ETFs can also provide a flexible way to gain exposure to different asset classes.

Understanding these advantages can help you make informed decisions and build a diversified investment portfolio.

Download the PL Capital application to invest in ETFs. PL also offers market reports with data-driven analysis.

Frequently Asked Questions

• Is it profitable to invest in ETF funds?

Yes, investing in ETF funds is beneficial. They offer diversification, affordability, and tax efficiency, which help both seasoned and beginner investors.

• What are the drawbacks of ETFs?

Some of the drawbacks of ETF investments are tracking errors and vulnerability to short-term volatility.

• Can you avail tax benefits while investing in ETFs?

Yes, tax benefits are one of the advantages of exchange-traded funds. You can avail tax benefits while investing in ETFs, especially through long-term capital gains (LTCG) tax in equity ETFs.

• Are ETFs more profitable than mutual funds?

ETFs and mutual funds offer different benefits. However, compared to mutual funds, ETFs are cost-efficient and liquid.