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ETFs can be traded on the stock exchanges, similar to equity shares.
ETFs are easier to buy and sell compared to mutual funds. (representative image)
An ETF (Exchange-Traded Fund) is a type of investment that works like a mix of a stock and a mutual fund. It is a collection of assets like stocks, bonds, or commodities, bundled together into one fund.
You can buy and sell ETFs on the stock exchanges just like regular shares. ETFs are also preferred by investors looking for an alternative to equities as they offer diversification and flexibility.
Instead of buying individual stocks, you invest in a basket of different companies pertaining to a particular asset class through ETFs. This helps reduce risk and makes investing easier, especially for beginners. ETFs are a smart way to grow wealth over time for investors looking forward to a low-risk option, compared to equity shares.
Types of ETFs
1. Index ETFs: Track a specific benchmark stock market index like the Nifty 50 or the Sensex.
2. Fixed Income ETFs: Provide exposure to bonds and other debt instruments, offering more stable returns.
3. Commodity ETFs: Invest in physical goods like gold, oil, or agricultural products, tracking their market prices.
4. Leveraged ETFs: Use borrowed money or derivatives to try and amplify returns — higher reward but higher risk.
5. Capitalisation ETFs: Focus on specific investment styles or categories like large-cap, small-cap, value, or growth stocks.
6. Foreign Market ETFs: Offer access to international stock markets such as Japan’s Nikkei, Hong Kong’s Hang Seng or the NASDAQ of the United States.
7. Inverse ETFs: Aim to earn profits when the market or index goes down — ideal for bearish strategies.
How Do ETFs Work?
An ETF provider owns the underlying assets—like stocks, bonds, or commodities—and creates a fund that mirrors the performance of those assets. Investors can then buy shares of this fund, which are traded on the stock exchange just like regular stocks of different companies.
When you invest in an ETF, you own a portion of the fund, not the individual assets. If the ETF tracks a stock index, your returns could be affected based on the performance of the index constituents.
Benefits of Investing in ETFs
1. Easy to Trade: ETFs can be bought or sold at any time during market hours, just like stocks.
2. High Transparency: Most ETFs disclose their holdings daily, so investors know exactly what they own.
3. Tax Efficiency: ETFs usually generate fewer capital gains, making them more tax-friendly than many mutual funds.
4. Flexible Trading Options: Investors can use tools like limit orders and stop-loss orders, which are not available with traditional mutual funds.
How to invest in an ETF
There are a few simple steps to get started with ETF investments:
Step 1: Open a Demat account
Sign up with a trusted stockbroker or online trading platform and complete the KYC process to open a Demat account.
Step 2: Choose the ETF
Pick an ETF that suits your financial goals—like index, sector, or commodity ETFs.
Step 3: Transfer the money
Add funds to your brokerage account through UPI, net banking, or any supported method.
Step 4: Place your order
Search for the ETF, enter the quantity and buy it like a stock.
Step 5: Monitor your investment
Keep an eye on performance and make changes if needed based on your goals.
ETF Investment: Risks to take into account
· ETFs are exposed to market volatility similar to stocks.
· Returns on ETFs could be affected due to several costs like expense ratios (fees), trading commissions and trading fees charged by brokerages.
· Trading volume and market liquidity can also affect your returns.
· ETFs are designed to often mirror their underlying index closely. However, a high tracking error could be risky for investors. The tracking error indicates the difference between the ETF’s performance and the index movement.
A team of writers and reporters decodes vast terms of personal finance and making money matters simpler for you. From latest initial public offerings (IPOs) in the market to best investment options, we cover al…Read More
A team of writers and reporters decodes vast terms of personal finance and making money matters simpler for you. From latest initial public offerings (IPOs) in the market to best investment options, we cover al… Read More
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