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What are ETFs and How to Invest in them?

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When it comes to investing, there are different options available to investors. Investing in Exchange Traded Funds (ETFs) is an option that has become increasingly popular. Investors have been attracted to ETFs because of their low costs, tax efficiency, transparency, and flexibility.

But what is an ETF? Exchange Traded Funds (ETFs) are like index funds or mutual fund schemes traded on the stock exchange. ETFs comprise a portfolio of stocks, commodities, or bonds that reflect the composition of an index, like BSE Sensex or S&P CNX Nifty.

One can buy and sell ETF units at market-determined prices throughout the day during market hours. This flexibility allows investors to make the most of market movements and maximize profits. ETFs have received acceptance, particularly from risk-averse investors who find it challenging to identify the right stocks for their portfolios. Read on to know more about ETFs and how to invest in an ETF to access different investment instruments.

Types of ETFs that investors in India can invest in

There are different types of ETFs, including:

  • Debt ETFs: ETFs that give investors access to bonds and other debt products are known as debt ETFs.
  • Equity ETFs: These ETFs contain equity securities or track an equity index.
  • Gold ETFs: Gold ETFs invest in gold bullion based on gold prices.
  • Global ETFs: Global ETFs invest primarily in foreign securities and follow global or country-specific benchmark indices.
  • Commodity ETFs: A commodity ETF is usually invested in physical goods such as precious metals, agricultural commodities, and natural resources.

Smart beta: These ETFs invest in stocks chosen based on criteria like value, low volatility, quality, or momentum. For example, a Nifty Smart Beta ETF targeting low volatility would include less volatile stocks

How to invest in ETFs?

Investors get many options to invest in ETFs online such as through mobile apps, where purchasing and selling of ETFs can be done with just a few clicks. However, remember that investors should have a trading account and a Demat account with a registered SEBI-authorised broker to invest. Also, identity proof, PAN card, and address proof are essential documents required to open a trading and Demat account.

Here is how to invest in ETFs:

  • Open a demat account and a trading account with a broker of your choice if you do not already have one
  • Research and compare different ETFs.
  • Fund your trading account and place the buy order. Once your order is executed, the trade is completed. You may get the ETF contract note and the transaction details showing statutory charges like GST, exchange charges, etc.
  • ETFs may be credited to the Demat account after T+2 days. After the units are credited, you can sell these on the stock market at any time.

To sum up

ETF investment offers diversification as you can invest in baskets of securities and get other benefits like trading flexibility, lower costs, risk management, and tax benefits. Also, ETFs typically have low expense ratios but incur certain costs. For example, ETFs, like stocks, are purchased as shares through a broker, so a brokerage commission can be charged whenever an investor invests in ETFs.

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