Stock / Share Market
by 5paisa Research Team Last Updated: 2022-09-29T13:06:08+05:30

How Can I Invest in ETF in India?

One of the most popular forms of passive investment in the world are ETFs or exchange-traded funds. Investing in ETFs in India is just beginning to take off. What is an ETF? Institutions will be able to join the ETF's portfolio by purchasing Nifty-related shares from the fund AMC that is sponsoring the ETF (in case of a Nifty ETF).

It is then offered in tiny units to individual investors in the same proportions as those of the Nifty components in the index. These are the units that are exchanged on the stock market. That brings us to our question: How can I invest in ETF in India? This post will answer all the questions that you might have before you decide to take the plunge into ETF investing.

What Exactly is an ETF?

First and foremost, an ETF is a kind of mutual fund. Like a mutual fund, it collects money from a variety of investors, appoints management, and calculates its Net Asset Value. However, ETFs have two distinct characteristics that make them stand out:

  • ETFs may be traded on a stock exchange in the same way as stocks (in the secondary market)
  • It has become one of the most popular kinds of passive investing in India since it is an index fund that is passively managed.

This is India's first exchange-traded fund (ETF), which follows the performance of the Nifty 50 Index. Thus, the fund management selects equities from the Nifty 50 index so that the fund may give returns comparable to the index's.

Like stocks, ETFs are traded on the stock market. As with stocks, they may be traded on an exchange, and the price of an ETF unit is not decided by the NAV but rather by supply and demand in the market. Before you ask yourself the question: how can I invest in ETF in India, you must open a Demat account and a trading account.

Why Should you Consider ETFs for Investing?

An ETF is a great strategy to diversify your stock portfolio. There are a limited number of equities that you may acquire when you invest in the stock market. As a result, stock selection becomes critical.

As a result, if you are wondering how you can invest in ETF in India that follows a certain industry or asset class, your portfolio will be more diversified and resilient. ETFs have a number of advantages, including the following:

  • ETFs, like shares, are readily traded on stock markets.
  • You have the possibility to benefit if the market is in favour of the sector or market that the ETF monitors since units are exchanged at market prices that are set by investor sentiment.
  • Units may be purchased and sold throughout the day, unlike mutual fund units, which can only be redeemed at particular times to take advantage of the current NAV.
  • An ETF's fee ratio is often lower than that of a typical mutual fund's expense ratio (especially actively managed mutual funds)

Things to Look for Before Investing in an ETF

There is a wide variety of ETFs to choose from in India. When looking for intricacies regarding how you can invest in ETF in India, here are 4 key things you should look out for:

1. The Category of the ETF

ETFs may be categorized into four groups: stock, gold, international, and debt, as stated above. The sub-categories must be examined as well as the main category. Many ETFs concentrate on certain sectors or market capitalizations, for example, if you opt to invest in an equities ETF.

2. The Trading Volume of the ETF

In 2002, India became the first country in the world to provide exchange-traded funds (ETFs). It used to be impossible to sell ETF units at any time, but that is no longer the case. Although certain ETFs still have lower trading volumes relative to the others, this is not the case for all of them. Choosing an ETF with a large volume of trading is essential if you want to get a decent price for your units.

3. The Expense Ratio of the ETF

An ETF's cost ratio is lower than that of an actively managed fund, as previously stated. To entice new investors, several fund institutions provide further reductions on cost ratios. An investment with a lower expenditure ratio has a higher probability of making money.

4. Ensure Lower Tracking Error of the ETF

An index is the most common target for ETFs. They invest in securities that make up the index in a way that mimics the index's results. Thus, the index and ETF returns are always going to be different.

The tracking error is a metric used to assess the ETF's deviation from the underlying index. Another way to look at it is to look at the standard deviation of daily returns for the index and the ETFs. The more closely an ETF's returns match those of the index, the smaller its tracking error. As a result, search for ETFs with minimal tracking error.

Final Thoughts

Make sure you grasp all of your investing possibilities and work on a strategy to achieve your financial objectives while keeping your risk tolerance and time horizon in mind. Get an investing strategy in place and learn about the complexities of ETFs before investing in an ETF.

They are meant to replicate the index's returns rather than outperform them, as they are passively managed. As a result, it is important to keep expectations realistic. You may also wish to include ETFs in your portfolio for further stability if you are an active investor or trader. Think before you invest, and do so intelligently.

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