Mutual funds are an investment vehicle that pools from investors sharing a common investment objective and pools funds across money market instruments, asset classes, currencies, and even foreign markets for income generation. Mutual funds mitigate the overall investment risk as they invest in a diversified portfolio of securities. It is a good idea to invest in mutual funds if you have a long term investment horizon and carry some risk appetite. Even if some mutual funds seem very risky in the short term, in the long run, they can offer high risk adjusted returns if investors remain invested without prematurely withdrawing their investment.
Exchange traded funds are one such investment scheme under the mutual fund umbrella that follows a passive investment strategy. Let us find out what exchange traded funds are and how one can invest in them.
What is an Exchange Traded Fund?
Commonly referred to as ETFs, an exchange traded fund is an open ended mutual fund schemes
that is listed at the stock exchange just like company stocks. It is the only type of mutual fund whose units can be traded at their live market price that fluctuates throughout the trading hours. In the case of other mutual funds, the investors have to place a request to the Asset Management Company for redeeming or buying mutual fund units. They can buy/sell units depending on the mutual fund scheme’s NAV (Net Asset Value) which is determined at the end of the day. In the case of ETFs, their NAV doesn’t matter as investors can enter of existing these funds at their current market price at the stock exchange. The NAV of the ETF may vary from what price at which it is traded during market hours.
How to invest in an Exchange Traded Fund?
There are multiple ways to buy and sell your ETF units but before that here are a few things that investors should be aware of:
– They need to have a demat account to store their bought ETF units
– They need a trading account to buy and sell their ETF units
In order to set up a demat account and a trading account, investors need to be KYC compliant. Know Your Customer is a one time mandate which all investors must comply with so that they can trade in ETF units.
To become KYC compliant, they must produce the following documents:
– Identity Proof: PAN Card Passport, Driving License,
– Address Proof: Passport, Electricity Bill. Landline Bill
– Bank Account Details: Past 6 months Bank Account Statement, Cancelled Cheque
Once you are done with all the pre-investment formalities, here are two ways in which you can trade with ETF units:
- You can be involved in a telephonic call with your broker and verbally tell them how many ETF units you wish to buy or sell. You may have to give your login ID details to confirm your identity. The broker will take down your request and execute it on your behalf. If you have bought ETF units, they should reflect in your demat account the following working day. In case you sold your ETF units, you should receive the sum equivalent to the value of the sold units within a few days in your registered savings account.,
- Another way to invest in ETFs is by logging on to the broker’s or AMC’s website or by using an online application made available for investors. Investors can manually buy or sell ETF units through a mobile app or an online platform as well.