Posted on 10/15/2020 9:30:00 AM

Step 1

Pick a benchmark index

If you have a preference for any asset class – equity, debt, gold etc., you can pick an index that tracks them. There are even indices based on specific market segments such as market caps (large, mid and small caps) or sector (IT, pharma, FMCG etc). Once you’ve zeroed in on an ETF that tracks your preferred benchmark it’s time to check its trading volume.

Step 2

Check the trading volume

The trading volume of an ETF holds vital information. The higher the trading volume, the lower the bid-ask spread and hence lower cost of investment. An ETF with a high trading volume is definitely preferable.

Step 3

Size up Tracking Errors

ETFs aim to track market indices as closely as possible. Sometimes an ETF may not show the same growth appreciation as the index it follows. This is called a tracking error. While you should look for an ETF with minimum tracking error, remember that SEBI has allowed ETFs to have a tracking error of only 2%.

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