First launched over 30 years ago¹, ETFs transformed the investment landscape for the retail investor. This rather novel method of investment proved that one does not have to be an expert analyst to be able to park money in different asset classes. With an ETF, investors get exposure to a diversified portfolio of shares at a low cost which can be sold like any other equity. It enables people to access a pool of investment instruments.
They are classified into several types, including debt or Fixed Income ETFs, equity ETFs, commodity-based ETFs such as gold and silver. The only prerequisite to start investing in ETFs is to have an active demat account with a financial intermediary.
And going by recent statistics, India has actively started investing in the recent past as compared to the previous decade. For instance, August was a landmark month for Indian retail investors. Number of demat accounts, that help investors hold shares and securities in electronic format crossed the 100 million mark². The figure is nearly 2.5 times that of what it was before the pandemic in March 2020³. A demat account is mandatory for all traders who can hold stocks, securities like Initial Public Offering (IPO), bonds, government securities, mutual funds and indeed Exchange Traded Funds (ETFs) too.
What are some of the key advantages of ETFs?
An ETF invests in an Index consisting of basket of securities. Hence, every unit has the potential to provide diversification across stocks, assets or even sectors depending upon the type of ETF. Hence, such a strategy allows investors to cushion their savings if one asset class starts to bleed.
Moreover, ETFs can be traded on stock exchanges much on the lines of shares. Hence, they can be bought and sold intra-day like stocks
How should one go about choosing the right ETF?
The decision around the choice of any given ETF is largely down to the investor’s time horizon and the risk appetite. First, do your own research. Find out which category of ETF may best suit your savings goal. For instance, if you decide to invest in an equity ETF, look for various subcategories of that instrument based on various factors like capitalisation and sectors.
Low cost investment option
ETFs have a reputation to have the lowest cost among various investment options. This makes them an alluring option for retail investors to consider especially for the long run.
So, how should one go about buying an ETF? Here’s a step by step guide:
1) Set up an investment account: As an investor you can go for a full-service account with a brokerage house. Here, you can have guidance from a financial advisor who can buy and sell ETFs on your behalf. Alternatively, a Demat account, too, will enable you to trade actively by yourself.
2) Choose the right ETF: After carrying out your due diligence you can choose among multiple options by comparing the performance of different ETFs. Many apps and websites today offer an easy way to review trends and returns over a reasonably long period of time.
3) Set aside a corpus: Set some portion of your savings aside such that it can be invested in an ETF at regular intervals. Investing via Systematic Investment Plan is fruitful in the long run as the rupee cost averaging strategy gets applied.
4) Make a purchase: Place an order for the ETF like you would for any other stock via a Demat account.
Given their advantages, ETFs are a popular means of investment globally. In India, they have grown by 117% since 20204. The interest grew largely on account of the instrument’s flexibility and versatility. Consider ETFs if you haven’t already as a means to diversify your investment portfolio.
Visit www.icicipruamc.com/note to know more about the process to complete a one-time Know Your Customer (KYC) requirement to invest in Mutual Funds. Investors should only deal with registered Mutual Funds, details of which can be verified on the SEBI website https://www.sebi.gov.in/intermediaries.html For any queries, complaints & grievance redressal, investors may reach out to the AMCs and / or Investor Relations Officers. Additionally, investors may also lodge complaints on https://scores.gov.in if they are unsatisfied with the resolutions given by AMCs. SCORES portal facilitates you to lodge your complaint online with SEBI and subsequently view its status.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.
Moneycontrol journalists were not involved in the creation of the article.
1. https://www.vanguard.ca/en/investor/learn/featured-group/basics/history-of-etfs
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