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Is investing in ETFs a DIY strategy?

An equity index-linked ETF is one type of fund. It cannot be an alternative for all your investment needs.

Exchange-traded funds (ETF), which are the popular version of passive funds, are also being considered as the most viable option for do-it-yourself investors. 

Passive funds are those types of mutual fund schemes which don’t have a fund manager to do stock selection and simply mirror an existing index portfolio. 

Picking an active fund manager and their scheme which is most aligned to your financial requirements is not an easy task and you will have to analyse several factors. Thus, passive funds which do away with fund manager risk are touted as being easier to pick when you want to do it yourself. 

However, picking a scheme or fund to invest in is the last leg of the process. The goal-setting, appropriate asset allocation and risk profile are all that will take a lot more thought.

The prep before you arrive at the scheme

An equity index-linked ETF is one type of fund. It cannot be an alternative for all your investment needs. To understand your investment strategy better you will need some guidance on investment securities best suited to your different financial goals. The goal setting and risk profiling are not "do it yourself" activities. They require an outside nudge because of your own inbuilt biases. 

Moreover, your investment time horizon needs to be well-tuned to the investment products and to your needs, that too is not entirely a do it yourself bid. 

Then arriving at a suitable asset allocation to achieve the expected return for achieving your goals is step two. This too is not a do it yourself step. 

You may like ETFs as a low-cost option in your equity portfolio, however, they may fall short. ETFs will not help you with your stable return, regular income allocation. ETF returns in certain market cycles can fall way short of well managed active funds, thus making you miss out on long term growth. 

Moreover, your investment time horizon needs to be well-tuned to the investment products and to your needs, that too is not entirely a do it yourself bid. 

Can you just buy any equity ETF?

There are more than 50 equity-linked ETFs you can choose from. They aren’t all linked to the same underlying market index or even the same market capitalisation segment. While the majority are linked to the Nifty 50 or the Sensex, there are few which are also linked to overseas indices and mid cap indices. Moreover, the expense ratio or cost of each scheme varies. As a result, the return outcome for each is also slightly varied.

You may think it is an easy task to pick an ETF, but there is a lot of groundwork to be done here too. 

It’s perhaps better to say that picking an ETF has fewer variables involved as compared to picking an actively managed fund. However, it isn’t always a do it yourself option, especially if you have specific goals linked to the investment and a defined expected return in future. 

Investing is a lot more than just product selection. Unless you are able to do the analysis and research to pick the most appropriate ETF, its best to take the help of a good and qualified advisor.

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