Is demat account necessary for investing in exchange-traded fund?


Now that investing in stocks is easier than ever, what financial instruments should you choose?Even if you are new to the whole investment game, you may be familiar with mutual funds.Here, money is collected from a large number of disparate investors and allocated to different asset classes. Choose wisely and your investment should bring good returns. Exchange-traded funds (ETFs) are a little like mutual funds. The difference is that ETFscan be traded like stocks. And while you do not need a demat account to invest in mutual funds, a demat and trading account is necessary for investing and trading in ETFs.

HowETFs work

 

An ETF is a collection of securities that can be bought and sold on the stock exchange. Their asset allocation could compriseshares, bonds, currencies, commodities, and various other tradable instruments. Often, you will come across ETFs that track stock indices like the Sensex or the Nifty. An ETF that tracks the Nifty, for example, will invest in the underlying securities of the Nifty index.

ETFs also differ from mutual funds in terms of their valuation. The net asset value (NAV) of a mutual fund is computed only at the end of each day. But the valuation of ETFsis more similar to that of stocks. Since ETF units can be bought and sold in real-time during market hours, the fund value tends to fluctuate throughout the day.

 

How to invest in ETFs

 

Step 1: Open a demat and trading account

The demat account serves as a place to store your ETF holdings, while the trading account enables you to buy and sell ETF units on the stock exchange. If you don’t have one or both of these accounts, approach a registered depository participant (DP). You could even consider combined products like the 2-in-1 Account from Kotak Securities.

Next, download the account opening form via the DP’s website. Alternatively, drop in at their nearest branch office to collect the form in person.When submitting the account opening application, you must also submit identity and address proofs, bank account details, and a photograph. Once your paperwork is complete and the DP has successfully completed the verification, you will receive the new demat account details.

Step 2: Start investing

 

Log in to your demat and trading account on the DP’s online trading terminal. You can now place orders to buy or sell ETF units with ease and in real-time.Another option is to instruct your broker over the telephone to execute the transaction as per your specifications. Many of the bigger brokers nowadays offer a range of trading and investment platforms, enabling you to buy and sell ETF units and other instruments at your convenience.

 

Conclusion

 

For those who are unsure about where to invest, ETFs can provide a good starting point. Since ETFs invest in a wide range of securities, they enable you to diversify your portfolio through a single transaction. This not only reduces your portfolio’s risk potential but also allows you to get in on the action with a small amount of capital. If you need a further leg up, open a demat and trading account with a DP like Kotak Securities that places a wide range of educational materials at your disposal.