Investing in Exchange Traded Funds (ETFs) with a Demat Account
The Indian financial market offers investors numerous opportunities to invest and make hefty profits through different investment instruments. However, investing requires the knowledge and the fulfilment of numerous other processes before you can buy your first security. Among these processes, one of the first things you need to do is open a demat account and a trading account with a trusted depository participant (DP).
Many DPs offer the winning combination of a free trading account and a demat account, which are together needed for seamless trading in the financial markets. A demat account is used to hold all the securities virtually, while a trading account allows for completing the buy/sell financial assets in the market.
Once you open a demat account and get your free trading account linked to it, you can trade or invest in stocks, derivatives like options and futures, and mutual funds. This also means that you can invest in Exchange Traded Funds (ETFs), which are essentially a kind of mutual funds. This blog will detail Exchange Traded Funds and how you can leverage the financial instruments to earn good profits and diversify.
What are Exchange Traded Funds (ETFs)?
Exchange-traded funds (ETFs) are types of Mutual Funds that aim to track the performance of a specific index such as NIFTY 50, NIFTY Next 50, NIFTY Bank, etc. An index is a basket of stocks representing certain segments of markets. Exchange-traded funds invest in the same underlying asset as those in the index and the same proportion as their weight in the index. Hence, they can mirror the performance of the underlying index.
These exchange-traded funds can be based on indices tracking various asset classes like equity shares (e.g. NIFTY 50 ETF), bonds (e.g. 10-year G-Sec ETF), Gold (e.g. Gold ETF), Tri-party Repo (e.g. Liquid ETF), and derivatives such as futures and options.
Some common types of ETFs are:
- Index ETFs, which are benchmarked to indices like the Nifty or the Sensex.
- Gold ETFs, which are benchmarked to the physical asset of Gold.
- Sectoral ETFs, which are benchmarked to stock portfolios in different sectors like banking, IT, healthcare, etc.
- International ETFs, which are benchmarked to assets in the international financial markets.
How can you invest in ETFs?
- Step 1: Open a Demat account with a broker or a depository participant to hold your ETFs.
- Step 2: Open a trading account and link it to your Demat account. Many DPs and brokers offer a free trading account to applicants.
To open a Demat account and a trading account, you need to complete certain Know Your Customer (KYC) norms. Generally, DPs and brokers require the following documents from you to complete the account opening process.
- Proof of identity like your passport, driving license, PAN card
- Proof of address like your passport, voter ID, or any utility bills
- Bank account details and statements
Once you’ve completed the KYC formalities, the DP will open both accounts for you. After you get access to your demat and trading accounts ,you can buy or sell ETFs on the exchange.
What are the advantages of investing in ETFs using your Demat and trading accounts?
You stand to benefit in many ways when you invest in ETFs using a Demat account. Here are some of the main advantages of Exchange Traded Funds.
Transparency:
ETFs generally track indices or stocks they’re benchmarked to. Since you can always look at the parent benchmark, it’s easier for you to keep an eye on how your ETF is performing. This allows for transparent functioning and resulting transactions. Furthermore, you don’t have to spend valuable time conducting extensive research to study and analyse the performance of your ETFs.
Diversification:
You can increase your exposure to a wide range of stocks, indices, and assets by investing in ETFs. The process effectively helps you reduce the level of risk involved in your investments. By planning your portfolio smartly, you can significantly minimise stock-specific and sector-specific risks. You can also use ETF investments as a hedging strategy to manage risks related to your investments in other asset classes.
Convenience:
ETFs are passive investment options that you can easily trade on exchanges using user-friendly trading portals. The exchanges constantly regulate the ETFs and ensure your investments are safe. Tracking the value of your investments is also simple and convenient. Hence, ETFs are ideal investment options for beginners and seasoned investors alike.
Conclusion
With a demat account,you can enjoy all the benefits of ETF investments. Like all mutual funds, ETFs also have expert fund managers that help manage your investments professionally and effectively. These benefits, coupled with low transaction charges and easy investment strategies, make Exchange Traded Funds excellent investment options. To enjoy the benefits of investing in ETFs, simply open a Demat account and a trading account to get started.