Mutual funds are the preferred choice for retail investors. However, they come at a cost and fund management risk, apart from other risks. A smarter alternative is to invest through ETFs.
ETFs have become very popular due to their flexibility, low costs, and ease of investing. There are over 225 ETFs (including 18 gold ETFs) offered by various fund houses.
These are traded on stock exchanges and can be bought and sold like shares at the prevailing market prices. They typically track an index, commodities, such as gold and silver, or a basket of securities (stocks of the underlying index).
On account of their unique structure, the difference between the market price and the underlying NAV is marginal. ETFs also boast of a lower tracking error.
One of the main advantages is their ability to offer diversification, as they allow investors to buy a collection of securities in a single transaction.
Here’s a step-by-step guide to help you invest through a demat account or from a fund house.
Buying Through Demat Account
1. ETFs can only be bought in demat form. You need to open demat and trading accounts from a brokerage firms.
2. Once you have a brokerage account, choose among different ETF products, depending on your risk appetite and goals. There are variants such as index, commodity, thematic and factor ETFs.
3. Once you have selected an ETF, add them to your watchlist. It will help you track the price movement of the chosen ETFs instead of searching for options before investing.
4. Next, you can place your order through your trading account. You can choose from different types of orders, such as market order and limit order. In market order, you will buy or sell at the current market price, while in limit order, you will have to specify the price at which you want to buy or sell. Add the quantity and place the order. Once the order is executed, it will reflect in your portfolio.
Buying Through Fund House
When investing through a fund house, check the ‘Creation Unit Size’, which refers to the minimum number of units required for fund houses to create a basket that can be listed on the exchange. This is typically on the higher side and, so, is suitable for high networth individuals. For instance, the Creation Unit Size of Nippon India ETF Nifty 50 BeES is 50,000 units, or an investment of `13.70 crore in one go.
Factors To Consider Before Choosing A Broker
Fees
Look for a brokerage firm with low trading fees and no commissions. Some brokers offer commission-free trading for certain ETFs.
User-Friendly Platform
Ensure the trading platform is user-friendly and provides the tools and resources you need.
SIP Facility
Not all brokerages offer systematic investment plans (SIPs). SIPs help in rupee-cost averaging.
Factors To Consider Before Choosing An ETF
Expense Ratio
This is the annual fee expressed as a percentage of your investment. Lower the ratio, the better will be your long-term returns.
Tracking Error
This shows how closely an ETF follows its benchmark index. Lower tracking error means better performance.
Liquidity
Look for ETFs with higher trading volumes. Higher trading volumes mean higher liquidity.
