How should beginners invest in ETFs?

ETF investing strategies for beginners

If you are new to the markets and are only aware of the general trends, ETF investing might be a good strategy for you. ETFs are easy to purchase and allow you to invest in a diversified portfolio, even if you have very low capital to be invested.  The expense ratio of ETF is less, and therefore, you have a higher profit margin from market upturns.

First, we’ll address the issue, “What is an ETF?” ETFs are an abbreviation for exchange-traded funds. It is a collection of stocks/bonds/commodities etc. and the ETF tracks an underlying and ensures that the portfolio is aligned to that underlying. For example, a Nifty ETF will track the performance of Nifty, and ensure that you generate Nifty returns. Some advantages are given below:

Also Read: https://www.tomorrowmakers.com/other-investments/best-etfs-invest-india-article

Cost average in Rupees

You consistently acquire assets worth a predetermined amount of money regardless of how the asset’s price varies. If you are new to investing, you should try to save a constant amount in an ETF or a combination of ETFs every month, no matter how low you invest. This will help you create discipline in your saving plan. It is preferable to spend time in the market rather than increasing the risks.

Asset allocation

Simply said, you should not put all of your money into one asset type. Instead, you should divide it among several asset classes such as stocks, bonds, commodities, and so on. ETFs can help a beginner implement a simple asset allocation strategy. Your risk tolerance should guide your asset allocation. For example, if you invest in a healthcare ETF, your returns will track the performance of the healthcare stocks. A gold ETF will invest in gold. Thus, you can diversify your holdings and allocate assets very easily.

Related: https://www.tomorrowmakers.com/retirement-planning/how-asset-allocation-linked-retirement-planning-article

Sector rotation

ETFs are an excellent way to obtain exposure to a sector that would otherwise be difficult to invest in. Consider the Healthcare sector ETF. If you want to invest in the healthcare sector, you need to figure out the stocks and then proceed with the investment. But, with the healthcare ETF, you can simply invest your money in the healthcare ETF and profit from the growth in the sector. It also allows you to undertake sector rotation, in which you can book profits from one ETF and switch to another based on economic cycles. This is especially important in businesses that operate on a cyclical basis.

International growth

ETFs also help you to diversify your portfolio beyond India by allowing you to invest in regional and worldwide markets other than India. The Hang Seng Tech ETF for example tracks the performance of the top tech companies in China. Thus, you can simply invest in an ETF, and obtain geographical diversification as well.

Also Read: https://www.tomorrowmakers.com/mutual-funds/top-performing-international-mutual-funds-invest-india-global-funds-us-and-china-equity-funds-article

Conclusion

ETF investing can work if you can identify broad trends and invest accordingly. You don’t need to research individual companies, and you can simply invest in a particular sector, geography, asset class, etc. For beginners, the best thing they can do is identify broad trends; like if you believe in the growth of the healthcare sector in India, you can directly invest in the healthcare ETF.