Exchange Traded Funds (ETFs) are Index funds, which can be traded on the exchange like stocks. Index funds are mutual funds which tracks an underlying index or an asset class. ETFs can be bought through a stockbroker or an online trading account.
While ETFs usually attracts low charges, you must research well before opening an account with a broker. Another aspect that you need to keep in mind is the stock exchange (s) with which the broker is registered and the list of ETFs offered through him. It is advisable to have a list of ETFs ready before approaching a broker to open an account as that would help you in ensuring that you get exactly what you need.
Two fundamental questions you need to ask before investing in an ETF is:
- What is the underlying index or asset class tracked by the index?
- How long has the ETF been operational?
A long-term and solid track record should be the first check box you should tick when you are planning to invest in an ETF. With fund managers looking at newer avenues to create investment opportunities for people, the index or asset class being tracked by the fund is also important to ensure that you avoid sailing your ship in unchartered waters.
Consider the costs
While investing, the returns should be calculated after deducting costs. An expense ratio is similar to an annual fee charged by fund houses and is expressed as a percentage of assets deducted each financial year towards the costs incurred by the fund. When you trade in ETF units, the brokerage also adds up to the cost incurred. A strategic investor must take all possible costs into consideration before investing.
Portfolio or Lifecycle ETF
Planning your finances for retirement is one of the biggest financial goals for most investors. There are a few ETFs available in the market today that have an underlying asset class mix of bonds and stocks which can get conventional as you approach retirement. If you are looking at investing in ETFs for the long term, then these funds are made for you. Ensure that you check for additional charges, if any, and shop around before you invest.
When it comes to investments, a miscalculated sale can drag your earnings down. The profit or loss made by an ETF tracking an index or an underlying asset is determined by the performance of the index or the asset. ETFs, like other financial instruments are taxable in India. Profits made can attract a short term capital gain or a long term capital gain or a Securities Transaction Tax (STT). Ensure that you factor in the tax implications before making an investment.
Remember, there is an investment tool for every type of investor and all kinds of financial needs. The risk-return ratio lies at the foundation of investments. Research well and seek professional advice, if needed, before making any investment decisions.
Source/Reference Link: http://guides.wsj.com/personal-finance/investing/how-to-choose-an-exchange-traded-fund-etf/
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.