Exchange Traded Fund (ETF) - Step-by-step guide on how to invest in ETFs?

What is Exchange Traded Fund?

➤ An Exchange is a place were you can buy or sell shares, bonds, golds, commodities, funds, and derivatives.

➤ Exchange Traded Funds (ETFs) are funds, which are traded on the exchange like a share. 

➤ ETFs are very similar to Mutual Funds, They are also a pooled investment vehicles, means:- they also collect money from several investors and use that money to buy a basket filled with different type of securities such as:- Shares, Bonds, Golds, Commodities, etc. based on their theme.

A theme can be like:- investing in Banking stocks or, investing in Blue-chip companies or, investing in Basket of shares which replicate the Indices such as SENSEX, NIFTY, S&P500, Dow-Jones etc. (it is also called Benchmark ETFs/ Index ETFs).

➤ When you buy shares/ units of an ETF, you are actually buying shares/ units of a portfolio that tracks the return of an index.

➤ Exchange Traded funds are offered ( sponsored) by a Asset Management Company (AMC).

How investors earn income from investing in ETFs?

➤ ETF prices depend on demand and supply of its units/ shares on exchange, when their is more demand than the units of sale so there is a possibility that the price per unit will rise and an investor can earn by selling units at higher price, leads to Capital Gain. (Capital Appreciation).

➤ 2nd way of Income is Dividend, or Interest in case of bond ETF.

How an Exchange Traded Funds works?

Step 1:- ETFs are created by Fund sponsors (i.e. Fund manager) who determine which securities will be included in the basket of securities.

Step 2:- Now ETF sponsors goes to an Authorized Participant (AP) (also called Institutional investor) who will then acquire the securities that the ETF wants to hold.

Step 3:- Once the Authorized Participant (AP) has bought the share in the same proportion as specified by the Fund sponsors, it will deliver those to the ETF sponsors in Exchange for an equivalent value in ETF Shares or Units.

Step 4:- These shares or units that an Authorized participant receives is called Creation units.

Step 5:- These share can then be sold by Authorized participant in the secondary market to investors who want to buy the ETFs. 

What are the different types of Exchange Traded Funds? 

These are some of the popular ETFs categories :- 

•  Index ETF :- Index ETF is the most popular ETF, it invest in the basket of shares which replicate an index's performance. To replicate an index it buys every stocks available in an index in the same weights. it is also known as Benchmark ETF (e.g. NIFTY50 ETF, S&P500 ETF, etc.).

•  Stock ETF :- This ETF offers investors to invest in particular set of equity stocks. they can track stocks in a single industry (like ;- Bank ETF, Auto ETF etc.) or stocks of multiple industry.

•  Bond ETF :-  This ETF aims to replicate the returns of an index of bonds by investing exclusively in bonds such as Corporate bonds, Treasury securities, International bonds, Convertible bonds, Floating rate bonds, etc.

•  Commodity ETF :- This ETF invests in Commodities such as Gold, Silver, etc. Like Gold ETF:- it mimic the domestic spot price of gold as closely as possible.

•  Currency ETF :- This ETF helps investors to gain exposure of Foreign Exchange (Forex) or Currencies. Currency ETF aims to track the relative value of a currency or a basket of currencies. Like:- Euro Currency Trust(FXE), Swiss Franc Trust(FXF), etc.

•  Leveraged ETF :- This is a highly risky ETF, use debts and financial derivatives to enhance the returns on the underlying assets.

•  Global ETF :- Global ETF is an exchange traded fund that invests specifically in foreign based securities. it may track a  foreign country's Index or Equity shares or Bonds.

Best ETFs to invest in india-2021 

How to invest in ETFs?  

ETFs are offered by many Asset Management Company (AMC) but check who has the highest Assets Under Management (AUM) and lowest commission. 

Step 1:- Go to the website or App of the brokerage of your choice (like:- Zerodha, Angel broking, kotak securities etc.).

Step 2:- Open an account.

Step 3:- Set up an initial deposit.

Step 4:- Now log-in to your account and search the ETF of your choice.

Step 5:- Buy or Sell ETFs of your choice.

You must consult a Financial Adviser before investing your hard earned money in any of above mentioned categories.

 Thank You, Stay Happy And Safe...