Always thought that ETFs are too risky for you? They don’t have to be. ETFs can help you with diversification - across asset classes or across stocks and sectors. This can help to mitigate the risk of your overall portfolio.
Read on to know
1. Diversification across asset classes
When you buy an ETF unit you get to invest in all the stocks that the ETF invests in. ETFs invest in the same stocks and in the same proportion as the underlying index.
For instance, if you invest in a Nifty 50 ETF, you will get to invest in all the stocks that comprise the Nifty 50 Index. So if one stock or sector that comprises the Nifty 50 index performs poorly, others may perform better or remain stable,
Hence when you invest in an ETF, you refrain from putting all your eggs in one basket, helping to mitigate potential losses.
2. Diversification across asset
ETFs offer investment across various asset classes, like Equity, Debt instruments and Commodities. You can choose to invest in ETFs of one or more asset classes based on your investment goals and risk appetite. Equity ETFs invest in stocks of companies that comprise an index. E.g.: - Nifty 50, S&P BSE Sensex, etc. These are suitable for an investor with a higher risk appetite, as equity ETFs are good for a long term investment horizon. Debt ETFs invest in short-term maturity money-market and debt instruments like TREP’s, bonds, etc., which offer comparatively lower risk. Commodity ETFs invest in commodities like Gold and Silver which may benefit from inflation as their value tends to rise with inflation. These can also help you to diversify your overall ETF portfolio.
Therefore, if you have a lower risk appetite you can consider investing in ETFs that invest in Debt Instruments.
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