Once you take your baby steps into investing, you may start thinking about diversifying your portfolio. Mutual funds, bonds, shares are all different types of investment – but what if we told you that you can combine these in one fund?
An Exchange Traded Fund (ETF) is a form of investment that is diversified into various underlying assets such as stocks, bonds and commodities. You can trade this in the share market like a regular form of investment.
Before you begin investing in ETFs, you must understand the basics of ETF funds.
ETF funds can be of two types:
- Open-ended ETFs – They are traded as per their NAV. You can buy and sell them at any given point in time
- Closed-end ETFs – They are locked for a certain period. You can redeem them only at maturity
Who should invest in ETFs?
Investing in ETFs is suitable for the short or medium term. So ideally, investors who prefer swing trading, i.e., redeeming the trade value when the proper opportunity comes, should trade and invest in ETF.
ETFs are also a suitable opportunity for young investors with low investment value, who want to diversify their funds.
How do you start investing in ETFs?
With the definitions and ideal investor requirements out of the way, let us understand how to invest in ETFs.
For trading in mutual funds, ETFs, etc. in the stock market, you need two accounts:
- Trading account – A platform to buy, hold and sell shares
- Demat account – A platform to store and reflect the share held by the investor
You can easily open these accounts with any financial advisory or trading platform before investing in ETFs. You will need these documents:
- Address and ID proof such as PAN, driving license, or latest electricity bill
- Bank account proof such as your latest bank statement or a cancelled cheque
Once you complete the KYC, you will get your login credentials in 1–2 days.
Several ETFs are focused on a certain form of investment more than others. The following ETFs make it clear which asset class they primarily focus on:
- Equity ETF
- Bond ETF
- Commodity ETF
- Mutual fund ETF
Above all, as a young investor, you may try trading more with open-ended ETFs, as you can sell them when you feel they do not benefit you anymore.
How do you buy an ETF?
Before investing in any wealth creation and management scheme, research the funds currently doing well in the stock market. For leading ETFs, seek professional guidance from financial experts. You can contact your portfolio manager or relationship manager (provided by the broker) and place an order for buying an ETF.
Pick an ETF based on your risk appetite. Keep these basic requirements in mind while buying an ETF online:
- Choose an ETF which diversifies your portfolio according to your financial goals and needs.
- Keep in mind the transaction fees that brokers will levy on your transactions. Many brokers may charge high fees for portfolio managers who manage and handle an ETF.
- Accordingly, invest in an ETF that provides proper transparency of investments.
Understand your wealth creation and financial management goals. Invest accordingly in ETFs after suitable financial guidance.