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How ETFs help you diversify your portfolio

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Diversification is an important factor thatmakes your portfolioresilient against a bumpy market. Investing in stocks directly may increase your risk and require manual analysis which can prove hectic. However, mutual funds like Exchange-Traded Funds (ETFs)offer extensive diversification through a single investment as they include different asset classes in one fund. Additionally, they offer several other benefits, such as liquidity and are traded just like stocks in the market. Read on to understand how investing in ETFs can help you achieve a well-diversified investment portfolio.

What is an ETF?

ETFs are investment funds traded on stock exchanges, like individual stocks. They typically hold assets such as stocks, bonds, or commodities and can be bought and sold during the active market hours. One of the key advantages of ETFs is their ability to provide exposure to a diversified portfolio of assets through a single investment.

What are the different types of ETFs?

ETF mutual funds come in various types, catering to different investment objectives and asset classes. Some common types of ETFsinclude:

  • Equity ETFs: These track the performance of a set of equities in the stock market, providing exposure to a broad range of stocks.
  • Debt ETFs: These trackthe performance of Debt Indices in the market, offering income and potentially lower volatility compared to stocks.
  • Commodity ETFs: These track the price of commodities such as gold, silver, or oil, allowing investors to gain exposure to the commodity markets without directly owning the physical assets. For instance, investing in Gold ETFs is similar to investing in gold where the price of gold in the market decides your returns, but you don’t need to manage physical gold which often proves to be a hectic and costlier option.
  • Sector ETFs: These focus on specific sectors of the economy, such as technology, healthcare, or energy, offering targeted exposure to industry segments.
  • International ETFs: These provide exposure to foreign markets, allowing investors to diversify globally and potentially capitalise on opportunities in international markets.

How to invest in ETFs?

Investing in ETFs is relatively straightforward and can be done through a demat account online. Investors can buy and sell ETF units throughout the trading day, just like individual stocks.

HowETFs diversify your portfolio

ETFs play a crucial role in diversifying your portfolio by providing exposure to a wide range of asset classes and investment opportunities. By investing in ETFs, you can spread your risk across various sectors, industries, and geographic regions, reducing the impact of volatility in any single asset or market segment.

A portfolio comprising a mix of equity ETFs, bond and commodity ETFs can help mitigate risk by balancing potential returns with varying levels of volatility. Additionally, ETFs offer liquidity, enabling investors to easily adjust their asset allocation according to changing market conditions or investment goals.

Debt ETFs track Debt Indices, thus offering diversification within the fixed-income asset class.Commodity exchange-traded funds like gold and silver ETFs enable investors to diversify into precious metals, which often exhibit low correlation with traditional asset classes like stocks and bonds, thereby enhancing portfolio resilience during market downturns.

Conclusion

ETFs offer a convenient and cost-effective way to diversify your portfolio and achieve your investment objectives. With a number of options available across different asset classes and investment strategies, ETFs offer youan easy way to tailor your portfolio to meet specific needs and risk profiles.

Whether you are a seasoned investor looking to fine-tune your asset allocation or a new investor seeking a simple yet effective way to build a diversified portfolio, ETFs present an attractive investment solution.

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