Exchange-traded funds (ETFs) are a type of mutual fund that works like shares, as they can be traded on the stock exchange. Just like stocks, their prices are affected by the trading that takes place on the stock exchange. However they do offer some tactics to help you safeguard your investments. So what are they?
- Proper timing: Proper timing is the key to maximizing your returns. You should have proper timing for both buying and selling the stocks, as you won’t gain anything by holding on to the stocks by hoping that the situation will improve. Instead it is advisable to exit the stocks if there is a decline of 8% in the value of the stock from its highest price. Then once the market has stabilized, you can again buy the stock. It will help you in saving some amount of capital.
- Stop orders: Place a stop loss on your stocks so that if their prices go below this figure, you can sell them. It will help you in protecting your downsides and lower your losses.
- Selling: Sell your ETF to raise cash if you are in desperate need of money, as it will help you in getting necessary cash for your needs. Alternately you can invest that money in some low-risk investment avenue like bank FD or government bonds, to protect your money.
- Rebalance your portfolio: Divide your portfolio amongst stocks, bonds, gold and mutual funds. This means if the stocks are not doing well, you always have other investments to fall back on. Similarly divide your stocks amongst those belonging to different sectors. So if one sector like IT is not doing well, it will be offset by good performance of another sector like FMCG.
Follow these tactics and protect your wealth even during the downtimes.
Want to invest for high returns but also want to reduce risk? Then opt for ETFs. While ETFs are not popular in India, they are very much in demand in the US.
Now you may be wondering, what are ETFs and why have I not heard about them before. For one, they are a new entry in India and another is that you can invest in them through brokers who are more interested in making money though trading than marketing the ETFs.
Here let us take a look at what is an ETF and how does it work
What is an ETF?
ETF is also called as an exchange traded fund and is a type mutual fund. However it differs from a traditional mutual fund in that it simply tracks the underlying index. This means unlike a normal mutual fund, an ETF is passively managed. There is no frequent buying and selling of securities as it normally occurs with a traditional mutual fund. This reduces the chances of fund manager making mistake while selecting securities. Moreover an ETF can invest in shares , gold silver or even debt. It can also invest in a certain sector.
When an ETF is first launched, it is offered by the fund house. But after the ETF opens for subscription, it is listed on the stock exchange just like shares of a company. You then have to approach a broker to trade in the ETF. Just like shares, units of an ETF can be traded during the market hours, thus letting you benefit from market movement.
An ETF invests in the stocks of the companies included in the underlying index in the same proportion as is present in the benchmark index. E.g. if RIL, ICICI Bank and ONGC constitute 8%, 5% and 3% of the benchmark index, then the ETF will invest in these stocks in the same proportion. In this respect, it is similar to an index fund. However unlike index funds, ETFs don’t need a lot of investment and have a lower expense ratio.
How to benefit from ETF?
Go to a broker and open a demat account. Then start buying units of an ETF with an amount as small as Rs. 1000. However as they are mutual fund, do watch out for expense ratio, as expenses can erode the returns of the fund. Keep on investing by taking benefit of the market movements. With low expense ratio, low chance of error and superior performance, ETFs are the winner all the way.