Mutual Funds are considered as a beneficial investment option for investors. It is a flexible financial tool offering investors with an opportunity to have a fund portfolio encompassing various asset classes through different schemes available. For investors seeking further diversification, options of fund or wealth management are also available. Finally, investors can choose an active or passive style of investment. In the active style, the fund house regularly buys or sells units to generate better returns than the benchmark index. Passive style, on the other hand, is to mirror the portfolio of the market index to have similar returns.
Exchange Traded Funds (ETF’s) are usually passively managed funds, which are traded in the stock market. These are invested in securities, commodities or index, individually or as a combination. ETFs can be easily traded in the stock exchange like any other stock.
Before you start investing in ETFs, it is important to know that you need an active demat and trading account to invest in Exchange Traded Funds. These accounts require an adherence to KYC norms set by Reserve Bank of India (RBI) / Securities and Exchange Board of India (SEBI). Once your above mentioned accounts are active, investments can be done exactly the way shares are traded in the stock exchange.
If the broker with whom you have opened the trading account offers an online trading terminal, then you can place the buy / sell order directly through the terminal. Else, you can call your broker or visit him personally to place the request (this will depend on the services provided by the broker).
Some points to remember while investing in ETFs are:
- It offers flexibility of buying or selling anytime during the market hours of the exchange. This can help you to capitalize on sudden opportunities that may arise during the course of the day.
- Some ETFs offer a diverse portfolio with a calculated balance between stocks and bonds. This diversification can help you hedge against volatile market behavior. ETFs can also be purchased across specific sectors or asset classes.
- ETFs can be good for investors looking for regular income as many ETFs focus on companies which pay dividends.
- By the virtue of being passively managed, ETFs are not traded as much as actively managed funds. This invariably means lower brokerage costs and lower tax implications.
ETFs are a good option for investors looking for a diverse portfolio across an underlying index or an asset class. Before you decide to invest in ETFs, it is imperative to understand if you are looking for an active or a passive style management of the fund. Understanding your investment needs and gathering detailed information about the investment tools are prerequisites to a sound investment and ETFs are no different. Be wise and invest smart.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.