Exchange Traded Funds (ETFs) offer portfolio diversification and index linked returns. They are a worthwhile investment option for all investors, as they also come with a low expense ratio and adequate liquidity. As a new investor, you need to have a demat account to invest in ETFs. With features like low minimum investment requirements, investing in ETFs is especially useful for beginners.
Read on as we look at some beginner strategies for investing in ETF and how to maximise your returns.
Understanding Exchange Traded Funds
Before beginning your ETF investments, you must understand how an ETF works. ETFs represent a pooled investment that mimics the performance of a single or group of indices, sectors, or assets. For instance, there could be an ETF tracking the performance of the NIFTY 50 or the NIFTY IT index. The returns offered by such ETFs would depend on the performance of the underlying security.
Coming to the fundamentals of an ETF, its cost is decided based on the demand and supply and is called NAV (Net Asset Value). Like stocks, it includes buyers and sellers who trade their ETF units for profits. If you buy an ETF at a lower NAV and sell at a higher one, you enjoy capital appreciation.
Commonly, mutual funds have expense ratios ranging upto 2.25% whereas an Exchange Traded Fund has an expense ratio lower than 1%.
Strategies for ETF investments for beginners
Here are a few strategies beginners can implement to invest in ETFs:
- Investment through SIP
Like any mutual fund, you can invest a small amount monthly in an ETF fund through SIPs (Systematic Investment Plans). Since new investors are usually new professionals and don’t possess significant capital, they can invest periodically with what they save monthly.
- Asset allocation
Asset allocation means allocating various portions of your funds to different asset categories such as stocks, bonds, securities, etc. A low investment threshold makes it easier for new investors to invest in different ETFs based on their investment horizon, risk appetite, and financial objectives.
- Portfolio diversification
An effective asset allocation can diversify your portfolio, which is crucial for all investors. Portfolio diversification helps mitigate market volatility and maximise your returns. Thorough market research can help you with asset allocation and diversify your portfolio. You can also take professional help for asset allocation and portfolio diversification if you are unsure about market trends.
- Sector rotation
Sector rotation means moving your funds from one sector to another for risk mitigation or enhancing returns. ETFs provide easy and flexible ways for sector rotations. You can move your surplus profits from a risky sector to a defensive one to protect your returns.
Since ETFs offer numerous features such as fund liquidity, low investment threshold, and a low expense ratio, they are an ideal option for beginners. Moreover, these funds offer flexibility to rotate funds between sectors for security, and as a new investor, you can also plan a SIP to avoid financial burden.