Demat Account for Investing in Exchange Traded Fund

To invest in the financial markets, one of the first things you need to do is open a demat account with a trusted depository participant (DP). Many DPs offer the winning combination of a free trading account and a demat account, which can together help you invest or trade in the financial markets as per your needs. When you open a demat account, you’re essentially ensuring that you have a safe virtual space to hold the assets you buy. A free trading account, on the other hand, helps you buy or sell financial assets in the market.

Once you open a demat account and get your free trading account linked to it, you can trade or invest in stocks, derivatives like options and futures, and mutual funds. This also means that you can invest in Exchange Traded Funds (ETFs), which are essentially a kind of mutual funds.

What are Exchange Traded Funds (ETFs)?

ETFs are basically mutual funds that are listed on the stock exchange, just like how shares are. They’re excellent passive investment options, and they’re available in various categories. Broadly, the following four categories of Exchange Traded Funds are generally popular.

  • Index ETFs, which are benchmarked to indices like the Nifty or the Sensex
  • Gold ETFs, which are benchmarked to the physical asset
  • Sectoral ETFs, which are benchmarked to stock portfolios in different sectors like banking, IT, healthcare, etc.
  • International ETFs, which are benchmarked to assets in the international financial markets

How can you invest in ETFs?

To buy or sell ETFs, you need to first set up an online account to hold your funds and to support transactions on the exchange. This is how you can get started.

  • Step 1: You are required to open a demat account with a broker or a depository participant to hold your ETFs.
  • Step 2: You also need to open a trading account and link it to your demat account. Many DPs and brokers offer a free trading account to applicants.

In order to open a demat account and a trading account, you need to complete certain Know Your Customer (KYC) norms. Generally, DPs and brokers require the following documents from you in order to complete the account opening process.

  • Proofs of identity like your passport, driving license, PAN card
  • Proofs of address like your passport, voter ID, or any utility bills
  • Bank account details and statements

Once you’ve completed the KYC formalities and get access to your demat and trading accounts, you can buy or sell ETFs on the exchange easily.

What are the advantages of investing in ETFs using your demat and trading accounts?

You stand to benefit in many ways when you invest in ETFs using a demat account. Here are some of the main advantages of Exchange Traded Funds.

Transparency:

ETFs generally track indices or stocks they’re benchmarked to. So, it’s easier for you to keep an eye on how your ETF is performing, thanks to the high degree of transparency involved. You don’t need to read between the lines or conduct extensive research to study and analyze the performance of your ETFs.

Diversification:

By investing in ETFs, you can increase your exposure to a wide range of stocks, indices, and assets. This effectively helps you reduce the level of risk involved in your investments. By planning your portfolio smartly, you can minimize stock-specific as well as sector-specific risks significantly. You can also use ETF investments as a hedging strategy.

Convenience:

ETFs are passive investment options that you can trade on exchanges and user-friendly trading portals. The exchanges that are regulated well and investing in ETFs is a simple enough process. Tracking the value of your investments is also simple and convenient. All things considered, ETFs are ideal investment options for beginners and seasoned investors alike.

Conclusion

With a demat account, you can enjoy all these benefits associated with ETF investments. Like all mutual funds, ETFs also have fund managers that help manage your investments professionally and effectively. This, coupled with low transaction charges and easy investment strategies, makes Exchange Traded Funds excellent investment options.

To enjoy the benefits of investing in ETFs, simply open a demat account and a trading account to get started. The earlier you start investing, the more time your money has to grow into a sizable corpus.

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