Confused between choosing ETFs or direct equity route? This will help you

If you are just beginning to invest, or are in the early days of your investment journey, it is quite natural for one to get overwhelmed given the plethora of options available to choose from.

Directly investing into stock markets, exchange-traded funds (ETFs), mutual funds, commodities, currencies, bonds and derivatives of each of these are the various available options to choose from.

As an investor, you will want your investments to perform well, generate reasonable profits so that you can comfortably meet your financial goals while being aware of and remaining within one’s risk tolerance level.

Each investment instrument has a risk profile and its unique set of advantages. Given the variety of choices, investors do tend to find it hard to zero in on an investment vehicle, especially when it comes to choosing between directly investing into stock market or to invest through ETFs. In order to reach an optimal investment decision, it is imperative to understand the similarities and differences between directly buying into stocks and ETFs and assess how each of the options fits into your investment goals and risk profile.

To begin with, a share of any company represents a fraction of ownership in that specific company. Meanwhile, equity ETF is a collection or a basket of various stocks put together based on the index the ETF is replicating. When you buy into an ETF, you own a fraction of that pool of investments.

Now, given below are the similarities and differences between these two approaches of taking exposure to the stock market.

Similarities:

— Trade on an exchange, offering high liquidity and transparency: Because stocks and ETFs are traded in high volumes throughout the day on an exchange, it is easy to buy or sell shares at will. The exchanges also show real-time bid/ask price quotes and volumes of shares being traded, letting all investors see key trading information. This is known as price transparency.

— Offers a broad range of investment options: Both the routes can be used to invest in companies across market capitalisation. Separately, one can also invest in international markets.

— Supports a wide variety of order types: With the market, limit, good for the day, good until…, and other order types, investors have a range of choices about how they acquire shares and what price they pay for them.

— Risks Involved: By investing in an ETF, the risk involved is significantly lower as compared to directly investing into the market. In an ETF, the portfolio consists of different companies across sectors in proportion to the index the ETF is replicating. Even if there is a correction in a couple of names, the net impact on the portfolio will be minimal in nature. On the other hand, investing in individual stocks tends to be riskier, especially if you allocate money to just a few stocks you are bullish on. If any of these companies were to face a correction, then a major dent in the portfolio is very likely.

— Professional Management: ETFs are managed by a professional fund manager who is tasked with making the changes as and when any index composition change takes place. On the other hand, while investing directly, the onus of research and execution solely is on you.

— Cost Involved: ETFs offer one of the cheapest ways to take exposure to the capital market. The expense ratios are very low when compared to the variety of costs incurred when buying directly from the market. On the basis of these parameters, you can safely come to a conclusion that for most investors ETFs tend to score over direct equity investing. Whether you are a new investor or an experienced one, wanting to benefit from the growth potential of equities, ETFs emerge as one of the most cost-efficient ways to gain exposure to equities.