Exchange Traded Funds (ETFs) are quickly becoming one of the most popular investment choices in India, and for good reason. With their low costs, flexibility, and the simplicity of buying and selling them like stocks, it’s no wonder many investors are asking how to invest in ETF in India as a smarter alternative to traditional mutual funds.
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In this blog, we’ll walk you through everything you need to know about how to invest in ETF in India, including the different types of ETFs available, and the important things you should consider before diving in.
What is meaning of ETF?
ETFs are investment funds that track an index, commodity (like gold or silver), or a basket of securities (such as stocks of an underlying index). With over 225 ETFs available in the Indian market, these funds provide a cost-effective way to diversify your portfolio with a single purchase.
Key advantages of investing in ETF in India include:
- Low Costs: ETFs have lower expense ratios compared to mutual funds, making them an attractive choice for cost-conscious investors.
- Diversification: Investing in an ETF allows you to gain exposure to a variety of assets like stocks, commodities, and indices, which helps in spreading risk.
- Liquidity: ETFs are traded on stock exchanges like individual stocks, so you can buy or sell them at market prices during trading hours.
Fun Fact
Around 13% of the overall AUM of the Mutual Fund Industry is contributed by ETFs
Source:AMFI Annual Report
How to Invest in ETF in India: A Step-by-Step Guide
There are two main ways to invest in ETFs in India: through a Demat account or directly via a fund house.
1. Buying ETFs Through a Demat Account
To invest in ETF, you must first understand that ETFs are bought and sold in Demat form. Here’s a step-by-step guide on investing in ETFs using a Demat account:
Step 1: Open a Demat and Trading Account
- The first step is to open a Demat and trading account with a registered brokerage firm.
- Leading brokerage firms like Zerodha, Upstox, and ICICI Direct offer these services, making it easy for investors to start their ETF journey.
Step 2: Choose the ETF You Want to Invest In
Once your Demat and trading accounts are set up, you can begin exploring different types of ETFs available in India. The Indian market offers several categories of ETFs, such as:
- Index ETFs: Track major indices like Nifty 50 or Sensex.
- Commodity ETFs: Invest in commodities like gold, silver, or oil.
- Thematic ETFs: These ETFs focus on specific sectors or themes (like technology or infrastructure).
- Factor ETFs: These track factors such as value, momentum, or growth.
Step 3: Add ETFs to Your Watchlist
- A key part is monitoring the price movements of your chosen ETFs. Most trading platforms allow you to add ETFs to a watchlist, helping you track their performance before making any decisions.
Step 4: Place Your Order
After selecting the ETF, you can place your order. Here’s how you can do that:
- Market Order: Buy or sell the ETF at the current market price.
- Limit Order: You can specify a price at which you want to buy or sell. The order will only execute when the price reaches your target level.
Once the order is executed, the ETF will reflect in your Demat account and be part of your portfolio.
2. Buying ETFs Through a Fund House
Here’s how to invest in ETF in India through fund house:
Step 1: Select a Fund House
- There are several well-known fund houses offering ETFs in India, such as Nippon India, HDFC, and ICICI Prudential.
- Research the available ETFs and find out which fund house offers the one you want to invest in.
- This method involves buying units directly from the fund.
Step 2: Check the Minimum Investment Requirement
- Fund houses typically require a lot size for certain ETFs, which might be higher than investing through a Demat account.
- For example, a gold ETF may require a minimum investment of ₹50,000 or more.
- Always check the minimum investment size before proceeding.
Step 3: Invest in the ETF
- Once you’ve selected an ETF from the fund house, you can make the investment by purchasing the ETF units directly.
- This method is often used for buying commodity-based ETFs like gold ETFs.
Factors to Consider Before Choosing a Broker
The broker you choose plays a crucial role in the investment process. Here are some factors to consider:
- Fees: Look for brokers that offer low trading charges or zero commissions on certain ETFs. This will help you reduce the overall cost of investing.
- User-Friendly Platform: Ensure the platform is intuitive and provides all the necessary tools to monitor and execute your trades efficiently.
- SIP Facility: Check if the broker offers a Systematic Investment Plan (SIP) facility for ETFs. SIPs allow investors to invest a fixed amount regularly and benefit from rupee cost averaging.
Factors to Consider Before Choosing an ETF
It’s important to select the right ETF based on your goals. Here are some factors to consider:
- Expense Ratio: This annual fee is charged as a percentage of your total investment. A lower expense ratio means more of your investment is working for you over the long term.
- Tracking Error: This measures how closely an ETF tracks its benchmark index. Low tracking error is ideal for investors who want their ETF to closely reflect the performance of the underlying index.
- Liquidity: Higher liquidity means that the ETF is traded more frequently, making it easier to buy and sell at market prices without large price fluctuations.
Benefits of Investing in ETFs
- Diversification: Investing in ETF gives you access to a diversified portfolio, helping you spread your risk across different asset classes.
- Lower Costs: ETFs usually have lower fees compared to mutual funds, making them a cost-effective choice for long-term investors.
- Flexibility: ETFs can be traded throughout the day like stocks, giving you the flexibility to buy or sell when you wish.
- Transparency: ETFs disclose their holdings regularly, allowing investors to know exactly what they are investing in.
Conclusion
Investing in ETFs in India is a great way to diversify your portfolio with a low-cost, flexible investment option. Whether you choose to invest through a Demat account or directly with a fund house, how to invest in ETF in India is an easy and effective process. Always consider factors like expense ratio, tracking error, and liquidity when choosing the right ETF for your investment goals.
Start your ETF journey today and watch your investments grow with ease!
FAQs:
How to invest in ETF in India through SIP?
Many brokers and fund houses offer the SIP facility for ETFs, allowing you to invest small amounts regularly.
What is the minimum investment required to buy ETFs?
The minimum investment amount can vary depending on the broker or fund house. With a Demat account, you can buy one unit of an ETF, while fund houses may have a higher lot size.
Are ETFs a safe investments?
ETFs are generally safe as they offer diversification, but like all investments, they carry risks. Always assess your risk appetite before investing.
By following this guide, you now know exactly how to invest in ETF in India and how to make informed decisions about your investment. Happy investing!
