Preconditions

To invest in an ETF, you need the following:

• A demat account with any depository participant (DP).
• A trading account with the broker’s KYC process must be completed at the time of opening these two accounts.
• Some banks offer 3-in-1 accounts where bank account, demat account and trading account are opened all at once, using a single form.

Buy ETFs

Unlike buying mutual funds where an application form must be completed, one can buy an ETF by placing a buy order with the broker over the phone or through the broker’s online trading system. The market price at which the ETF is purchased depends on the demand and supply factors and may differ slightly from the end-of-day net asset value published by the fund house.

Types of ETFs

There are different types of ETFs available for investment. Index ETFs which replicate stock indices such as Nifty, Midcap index, etc., Commodity ETFs such as Gold ETFs, International ETFs which replicate certain international indices, Debt ETFs which replicate a debt index.

Point to note

• Unlike investing in stocks, investing in an ETF provides exposure to a set of stocks that make up the index, thereby diversifying risk.
• Since ETFs are passively managed funds, they have a relatively low expense ratio.

(Content on this page is courtesy of the Center for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)