Exchange-traded funds or ETFs allow you to invest in a fund that tracks an index to take advantage of the Index’s growth.
As of July 8th, 2022, both Sensex and Nifty have grown more than 65% in the last five years. Investing in an ETF that tracks either of the indexes could have given your corpus similar growth.
But ETFs are not limited to Sensex and Nifty alone. Hence, it is wise to try and understand ETFs in detail before you invest in one. Let us understand ETFs better and see how you can invest in one.
What is an ETF?
The working of an ETF is similar to the working of a mutual fund. ETTs, too, have a fund manager who is responsible to pool money from different investors and create and manage a portfolio that is according to the theme of the fund. But in the case of mutual funds, the fund manager’s research, knowledge, and views play a major role in creating the portfolio of the fund.
But on the contrary, since ETFs track an index as it is, there is no active involvement from the fund manager. Hence, an ETF is called a passive fund contrary to most mutual funds.
Another major difference is that ETF units are tradable in the stock markets similar to stocks. That gives them more dynamic pricing and increases its liquidity as well.
Things to know before investing in ETFs
Now that you understand what ETFs are, let us look at some things you should know before investing in ETFs.
As we have said above, funds are managed by experienced fund managers. Their job could include everyday research and management of the funds. An expense ratio is charged from the investors of the fund to compensate for this.
But since ETFs are passively managed, the expense ratios tend to be much lesser as well.
The choice among ETFs is not limited to Indexes like Sensex or Nifty alone. Some ETFs track different sectors as well. For example, an FMCG ETF will track the Nifty or Sensex FMCG index.
Furthermore, there are commodity ETFs that invest in securities like gold, silver, etc. as well.
There are also international ETFs that focus on foreign securities.
Here, different ETFs will have different characters as well. Hence, it becomes important to choose an ETF according to your risk appetite and investment goals.
Ease of investment
Another advantage of ETFs is that it is highly uncomplicated. ETFs are easy to research and understand – they track an index as it is. Investing in them is also easy, but it differs from investing in a mutual fund. Let us see how.
ETF investments – the prerequisite
As said above, ETF units are tradable in the stock market. That makes it secure, and to store one, you need to have a Demat account.
But getting one is the easy part, you just need to do some basic research and open one online through simple steps from a provider of your choice.
How to invest in ETF?
Once you have the Demat account ready, the rest of the process is similar to investing in a mutual fund. You just need to find a broker that works for you and choose the ETF you want to invest in.
The most important part is choosing an ETF that matches your investment goals and risk appetite. Make sure you do thorough research to make the most out of ETF investments.