Whenever we talk about investing in the market passively, one investment option which strikes our mind instantly is ETFs. While ETFs bring with them certain advantages but they do possess risks and have disadvantages. Let us discuss the same in the aspect.&nbsp;<ol><li>Not able to outperform:</li></ol>Identical to index funds, this doesn’t offer the potential for above-market value-added returns which are offered by actively managed funds, and also, these funds track the index (Nifty or Sensex) and therefore can't minimize the effects of bearish markets.&nbsp;<ol><li>Narrow Focus:</li></ol>ETFs most often track a single sector segment such as healthcare, technology, automobile, etc, or simply the index which increases the risks in one’s portfolio, especially when the sector doesn’t perform well. In crux, these are not well diversified to hedge the risk and volatilities of the market.<ol><li>Volatility:</li></ol>Despite a pinch of diversification offered, it not at all means that the investment is immune to volatility in the market. An investor can still suffer losses in a bearish market. This risk can go up in line with the narrowed focus on a specific sector as discussed in the previous point.&nbsp;<ol><li>Market Spread:</li></ol>If an investor buys a rare ETF, the buy/purchase spread might be somewhat significant. Though this can be avoided by investing in major ETFs.<ol><li>Demat Account</li></ol>To invest in ETFs, it is mandatory to have a Demat account. The transactions in ETFs can only be done through a broker’s platform by using the trading account. Also, the investors will need to pay brokerage, STT, and other account maintenance-related charges. For this, investors can simply consider investing in index funds which are mutual funds investing in these ETFs or tracking a particular index.

What are the disadvantages of ETFs?

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