The pandemic has led to a massive influx of first-time investors looking to embark on their online investing journey. Not to forget, below-average returns from savings accounts may also be a factor why investors are turning to stocks.
The influx largely made of young investors for whom fixed income securities may not be an option (due to paltry returns) and direct equity may be challenging.
ETFs or Exchange-Traded Funds are thus growing in popularity. So what is this fairly new asset and should a beginner invest in ETFs? We’ll break it down for you.
What are ETFs?
An ETF is a pooled investment security, a mutual fund and an equity hybrid. It is exchange-traded because it is traded on the stock exchange, similar to equity stocks.
But unlike a single asset that forms the basis of the latter, the former houses a basket of assets, which makes an ETF identical to mutual funds.
While most exchange-traded funds follow a particular index, commodity, sector, or an asset-type, they can also have specially curated offerings that house two or more asset types.
These are set up as open-ended in most cases and allow investors to enter or exit at any point in time. ETF investments have doubled from INR 1.54 lakh crore at the end of FY20 to INR 2.9 lakh crore in FY21.
These have been a viable alternative to mutual funds and are giving more options to those undertaking online investing without having to deal with the inherent bottlenecks of mutual funds.
Types of ETFs
As mentioned above, ETFs can be bifurcated into several types based on the underlying assets. The most popular ETFs traded in India are :
- Index ETFs: Track stocks from indices like Nifty 50, Nifty Bank, and others
- Bond ETFs: These ETFs track a set of bonds like t-bills and other government securities
- Gold ETFs: ETFs like these track one of India’s favorite investments – gold
- Currency ETFs: These give investors access to forex currencies like AUD, GBP, USD, and more
- Sectoral ETFs: These ETFs track stocks from specific sectors like IT, Pharma, and others
How Should Beginners Invest in ETFs?
Beginners often have a fear of missing out and end up investing in assets that are not worth their time and resources. But it is vital for you to understand the right way of online investing before splurging your money.
Some of the aspects to be kept in mind while investing in ETFs.
1. Choose the Right Category
Depending on the category, ETFs have exposure to different asset classes. Once you select the primary category, the next step is to select the sub-categories.
For example, if you choose debt ETFs, the sub-category can be government bonds, corporate bonds, and more.
Similarly, if you choose equity, the sub-categories can be based on capitalization or theme.
2. Evaluate the Expense Ratio
The expense ratio refers to the percentage of investment paid to the fund management team for their effort (salaries, ancillary expenses, and similar costs ). The higher the expense ratio, the lower the profits will be.
3. Trading volume
When ETFs first came into the picture, they suffered from liquidity issues. However, with investors, especially beginners, turning to ETFs, the liquidity issue has subsided to an extent. But you must look at the trading volume of the ETF before investing.
Eventually, you’ll need to open a Demat account with an online stockbroker to invest in ETFs.
Are ETFs Suitable for Beginners Investing Online?
With ETFs becoming a popular online investing vehicle, more and more different types of funds are being introduced. Given the diversification on offer, it is known to be a popular investment medium for beginner investors.
However, it is suggested that you conduct enough research before investing your hard-earned money in these funds.
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Disclaimer: This blog is not to be construed as investment advice. Trading and investing in the securities market carries risk. Please do your own due diligence or consult a trained financial professional before investing.