ETFs or Exchange Traded Funds are a passively managed investment option, which is similar to an index mutual fund or a single stock. They are referred to as a basket of stocks, bonds or commodities that track an index on the stock exchange. For instance, an ETF can reflect the composition of stocks in Nifty Index or Sensex index. ETFs can be bought and sold throughout the trading day (as per the net asset value or NAV disclosed on that day) like any stock. These investment vehicles can be looked at as a viable option by investors who have a long-term investment horizon and a moderately high-risk appetite.
Investors can take note of the following strategies when it comes to investing in ETFs:
- Time-horizon-based strategy
Investors can choose to invest in ETFs basis their time horizon. For instance, if an investor has long-term financial goals, they can choose a suitable ETF to invest in, that can help them aim for capital appreciation over the long term.
- Organized strategy
When it comes to mutual fund investments, individuals generally have an organized approach that they follow. A similar approach can be applied when investing in ETFs, wherein individuals can start early, choose the ETF scheme that suits their requirements, invest regularly and decide a period of time they wish to stay invested for, in these funds. They can choose to organize their approach based on whether they wish to have –
1. A diversified exposure to countries, markets or sectors.
2. Invest their surplus funds for a temporary time period, before choosing to reinvest.
3. A manageable cash inflow and outflow by availing the liquidity and market representation of the ETFs
4. More exposure to a specific sector in the financial markets
- Systematic strategy
Investors can choose to invest in ETFs through a Systematic Investment Plan. For this, they are required to have a demat account with the help of which they can start a SIP in the ETF of their choice. The same process of a SIP is followed here as well, where a prefixed amount is invested over regular intervals of time for duration until they achieve their investment objectives. This strategy can help investors inculcate financial discipline and help investors achieve their future goals.
Apart from the above strategies, investors can also choose to make their investment decisions based on the index that an ETF is benchmarked to. That being said it is important for investors to note that ETFs attempt to replicate the performance of the index they are benchmarked to Investors may seek the counsel of a financial advisor when it comes to choosing an ETF that best suits them.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.