Investing in Exchange Traded Funds (ETFs) has become easier than ever in India. Whether you’re a seasoned investor or just starting out, understanding the process and nuances of ETF investing is crucial. Let’s break down how you can get started with ETFs in India, step by step.
- Opening a Demat and Trading Account
Before you can invest in ETFs, you need to open both a demat and trading account. These accounts are essential, as ETFs are traded like stocks on the stock exchange.
What is a Demat Account?
A demat account (short for “dematerialised account”) holds your shares and ETFs in an electronic format.
Think of it as a digital vault where all your securities are stored safely, replacing the need for physical certificates. Without a demat account, you won’t be able to buy or sell ETFs in India.
What is a Trading Account?
A trading account is the interface that allows you to place orders to buy or sell ETFs on the stock exchange.
When you want to purchase or sell an ETF, you’ll use your trading account to execute these transactions, and the securities will be stored in your demat account.
Steps to Open an Account:
Choose a Broker:
Research and choose a broker that offers demat and trading account services. Most online brokers, like Zerodha, Upstox, and ICICI Direct, provide easy account opening processes.
Complete KYC:
You will need to complete the Know Your Customer (KYC) process by submitting identity proof (Aadhaar, PAN card), address proof, and a photograph. Many brokers now offer e-KYC, which can be completed online.
Link Your Bank Account:
To facilitate seamless transactions, link your bank account to your trading account.
Activate Your Account:
Once the documents are verified, your demat and trading accounts will be activated, allowing you to start investing.
Example:
Let’s say you want to invest in a Nifty 50 ETF. You would first select an online broker like Zerodha, complete your KYC, link your bank account, and activate your trading and demat account. Once done, you’re ready to buy the ETF.
- Selecting the Right ETFs for Your Portfolio
With hundreds of ETFs available in India, selecting the right ones for your investment goals can seem overwhelming.
But by focusing on a few key factors, you can find ETFs that align with your financial objectives.
Investment Objective:
First, identify your investment goals. Are you looking for long-term growth, stable income, or capital preservation? The type of ETF you choose should reflect your objective.
Equity ETFs:
These track stock market indices like the Nifty 50 or Sensex. They are best suited for investors looking for long-term growth and higher returns but with exposure to market volatility.
Debt ETFs:
These invest in bonds and fixed-income securities. If you prefer a more stable investment with lower risk, debt ETFs can provide a steady income with less volatility compared to equity ETFs.
Gold ETFs:
If you want exposure to gold, Gold ETFs track the price of physical gold. These are ideal for investors looking to hedge against inflation or seeking safe-haven investments during uncertain market conditions.
Risk Appetite:
Your risk tolerance should play a key role in selecting an ETF. For example, an equity ETF that tracks a volatile sector like technology can offer high returns but comes with higher risks.
On the other hand, a debt ETF focused on government bonds is much safer but offers lower returns.
Example of ETF Selection:
Suppose you are a moderate-risk investor aiming for long-term wealth creation. You might select a Nifty 50 ETF, which offers broad market exposure to India’s top companies. If you’re a conservative investor, a Debt ETF investing in government securities might be a better option.
- Step-by-Step Guide to Buying and Selling ETFs
Now that your demat and trading accounts are set up and you’ve selected the right ETF, let’s walk through the actual process of buying and selling ETFs.
Buying ETFs:
Log into Your Trading Account:
Open the trading platform (through a mobile app or website).
Search for the ETF:
Use the search bar to find the ETF you want to buy. For example, if you want to buy a Nifty 50 ETF, type “Nifty 50 ETF” into the search field.
Check the Price and Quantity:
Once you find the ETF, you can check its current market price. Decide how many units you want to purchase.
Place the Order:
After selecting the quantity, choose either a Market Order or a Limit Order.
Market Order:
You buy the ETF at the current market price.
Limit Order:
You set a specific price at which you want to buy. The trade will only execute when the ETF reaches that price.
Confirm the Transaction:
Once the order is placed, confirm it. The amount will be debited from your linked bank account, and the ETF units will be credited to your demat account.
Selling ETFs:
Log into Your Trading Account:
Access the platform where your demat account is linked.
Go to Your Portfolio:
Check your portfolio to see the ETFs you own.
Select the ETF to Sell:
Choose the ETF you wish to sell and select the quantity.
Place a Market or Limit Order:
Similar to buying, you can sell your ETF either at the market price or at a set limit price.
Complete the Sale:
Confirm the sale, and the proceeds will be credited to your linked bank account.
Example:
If you purchased 10 units of a Nifty 50 ETF at ₹100 each and the price rises to ₹120, you can sell those 10 units at ₹120 through a market order, making a profit of ₹20 per unit.
- Understanding ETF Pricing and NAV
One of the unique aspects of ETFs is how they are priced. While mutual funds are bought and sold at the Net Asset Value (NAV) determined at the end of the day, ETFs are traded throughout the day at market prices, which may differ from the NAV.
ETF Pricing:
ETFs are priced based on demand and supply in the stock market. If there is more demand for an ETF, its price can rise above its NAV. Conversely, if there is less demand, its price may fall below the NAV.
For example, let’s assume an ETF has an NAV of ₹100. If many investors want to buy it, the price may rise to ₹102 due to increased demand. Similarly, if there’s more selling pressure, the price could drop to ₹98.
Net Asset Value (NAV):
The NAV is the total value of all the assets held by the ETF, divided by the number of outstanding units. While the NAV is an important indicator of the ETF’s underlying value, it’s the market price at which ETFs are traded that investors need to focus on.
Premiums and Discounts:
Sometimes, ETFs may trade at a premium or discount to their NAV. A premium occurs when the ETF’s market price is higher than its NAV, and a discount happens when the market price is lower than the NAV. This can happen due to fluctuations in demand and supply or market sentiment.
Example:
If an ETF’s NAV is ₹100 but is trading at ₹105, it is trading at a 5% premium. Conversely, if it’s trading at ₹95, it’s at a 5% discount.
Investing in ETFs is a straightforward process, but it’s important to understand the steps involved and the factors that affect their pricing.
From opening a demat and trading account to selecting the right ETF and executing trades, the key is to stay informed and align your investment choices with your financial goals.
With the flexibility, low cost, and ease of diversification that ETFs offer, they can be a valuable addition to any portfolio, whether you’re a new investor or a seasoned one.