As you start earning, it is good practice to invest the money. Investments provide good financial security for the future. However, when there are so many different types of investments, it may be confusing. Today, let us learn about ETF, which is a simple means of investing to obtain good retains.
What is an ETF?
ETF stands for Exchange Traded Fund. Here, you can buy several bonds/stocks at the same time. An investor can buy shares of ETFs. The ETF share prices can fluctuate throughout the day. They are listed and traded on an exchange. ETFs hold multiple underlying assets.
ETFs offer good alternatives to individual stock picks. While services like Motley Fool make it easier for investors to choose stocks (read the full review here), many investors prefer the simplicity of ETF investing.
There are certain concepts to understand before you can invest in ETFs.
- Expense ratio – The fee that ETFs charge is called the expense ratio. For beginners, it is recommended to go with smaller expense ratios.
- Types of ETFs – There are two types of ETFs – passive ETFs and active ETFs. Passive ETFs (also called index funds) track an index and update the portfolio from time to time. If you are new to this, start with passive ETFs. In an active ETF, an investment manager manages the portfolio of securities.
Investing in ETFs
There are 2 ways to buy/sell an ETF. Three points to note before investing in an ETF –
- Ensure that you have a Demat account. It is needed to hold the ETF units.
- Open a broker account with a broker/sub-broker.
- Complete your KYC. You will need documents for proof of identity, proof of address and your bank account details.
You can now use the registered bank account for your ETF investments. You will need the current price of a single share to start investing. Check whether your broker is registered with the stock exchange. Now, there are two ways to buy and sell ETF shares.
- The first way is to call your broker. You can tell the broker about your trade specifications and buy/sell ETF units through the broker.
- The second way is to use an online trading terminal. You can place your order on the terminal.
Why should one invest in ETFs?
ETFs are considered as the ideal investment for youngsters. This is because they provide a host of benefits. Some of the benefits are discussed below.
- Reasonable transaction charges – Compared to other index-tracking products, you incur lesser transaction charges on ETFs
- Diversification – Diversification is a mantra that the majority of investors swear by. With ETFs, you can spread the risk over several securities. Stock-specific risk is minimum in this case. In a single transaction, you are exposed to a variety of stocks, sectors and commodities
- Liquidity – ETFs provide ample liquidity. They can be traded throughout the day. If you have limited capital, you can immediately exit a losing investment.
- Tax-benefits – If you are an ETF investor, the dividends you gain are tax exempt. To sell an ETF unit within 12 months, a short term capital gain tax is levied.
ETFs have the potential to produce great investment growth over a long period.