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A Quick Guide to Trading Exchange Traded Funds

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A Quick Guide to Trading Exchange Traded Funds

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Mutual funds have long been the stepping stone for investors before they take the plunge into direct investments and trading in the stock market.  But what if there was a step in between? What if you could trade mutual funds in the market? 

Mutual funds for trade

You cannot trade regular mutual funds like stocks on an exchange. They can only be purchased from Asset Management Companies (AMCs) using their website or mobile apps. But there is one kind of fund that can be traded on exchanges, just like stocks - Exchange Traded Funds (ETFs). 

What are ETFs?

Like mutual funds, ETFs are pooled investment vehicles that invest in a basket of securities like stocks, bonds, other securities and money market instruments. You can buy units of ETFs on an exchange and profit off any upward changes in the net asset value (NAV) over time. 

Also, ETFs are generally passive funds that are benchmarked against various indices. So, they need not be actively managed by a fund manager. This means you can get the potential benefits of both stocks and mutual funds in one asset. They offer the diversification of mutual funds with the liquidity of stocks. 

Your guide to trading ETFs

Here is what you need to do to start trading in Exchange Traded Funds online. 

Step 1: Open a demat account and trading account

The first thing you need to trade ETFs online is a demat account cum trading account. Although you can open these accounts separately, many Depository Participants offer them as a combined product to make it easier for traders. 

Step 2: Choose a broker or an online platform 

Next, you must choose a brokerage partner to begin your trading journey. Choose a broker whose brokerage plans are affordable for you. It also helps if the brokerage partner you choose has a mobile app to make trading easier. 

Step 3: Have a trading strategy in place

Another key component is having a trading strategy. You’ll need to do some thorough research and figure out what works for you. You can even seek professional help from an investment advisor if needed. 

Step 4: Choose the ETFs suitable for your financial goals

Choose ETFs that are suitable for your financial goals. Like mutual funds, ETFs also carry different degrees of risk based on the securities they focus on. Select ETFs that align with your risk profile, so you don’t take on more risk than you can afford.

Step 5: Start trading

Once you have covered all the above, you can start trading in ETFs via the trading platform of your choice. 

Points to keep in mind before you trade ETFs

Here are a few key things to keep in mind before you start your fund trading journey. 

ETF category 

ETFs can come in various categories like equity, debt, international and gold ETFs. Compare your options, research the categories and sub-categories and make a plan before you start trading. 

Expense ratio

A higher expense ratio can drastically cut down the returns you can earn on your fund trades. Always check the expense ratio before you buy a fund and go for ETFs that carry a lower expense ratio.

Trading volume

ETFs with a high trading volume are generally more liquid. You will have much less trouble buying and selling them quickly when compared with funds that have a lower trading volume. 

Whether you wish to trade in these assets or invest in them over the long term, ensure that you choose a suitable fund trading platform or investment app to implement your financial strategy. 

Frequently Asked Questions

1. Can I trade mutual funds like stocks?

No, you cannot trade mutual funds freely like stocks. Only one specific type of mutual fund, known as Exchange Traded Funds (ETFs), can be traded like stocks.

2. Are mutual funds publicly traded?

If you are wondering how to trade mutual funds online, you should know that, unlike stocks, mutual funds are not publicly traded. Only Exchange Traded Funds (ETFs) can be traded via stock exchanges like NSE and BSE. 

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