Careful consideration is necessary before making any investment. Your investment should be in line with your goals. If your objective is to earn above and beyond the fixed returns that typically bank instruments offer, then you should invest in market-linked instruments. They allow you to earn attractive inflation-beating returns. Two popular market-linked instruments are stocks and Mutual Funds.

Stocks are popular for their investment flexibility, while Mutual Funds provide diversification. If you wish to make the most of the benefits both instruments offer, invest in Exchange-Traded Fund or ETF. ETF is a financial instrument that has a basket of securities as its underlying assets. Your investment’s performance depends entirely on these underlying assets.

Like stocks, ETFs are listed on the stock exchange and are easily tradable. This means you can enter and exit your investment anytime. Following are a few considerations to make a profitable ETF investment:

Choose a suitable ETF category

Following are the most popular ETFs to explore:

  • Equity ETF – It is the most popular type to invest in. It replicates the performance of a market index or a group of stocks belonging to a particular industry or sector. This investment, however, involves a high degree of risk.
  • Gold ETF – The ETF is equivalent to physical gold units. It does away with the hassles of holding physical units and offers good value.
  • International ETF – Such an ETF allows you to participate in foreign markets, allowing your investment portfolio to gain international exposure.

Choose a suitable category of ETF you would like to invest in considering your investment goals and risk appetite. Furthermore, there are sub-categories as well. As mentioned, with Equity ETF you can opt for a particular index, industry, or sector. You can choose stocks belonging to a specific market capitalisation too. Learn about these options and make the best choice.

Be mindful of tracking error

A common challenge faced with ETF is a tracking error. This happens when there is a difference between the ETF’s performance and the underlying assets. You need to be mindful of it.

Consider liquidity

Though ETFs are known for being highly liquid, there are a few funds with which you can face liquidity issues. Consider the ETFs trading volume to determine its liquidity. If the ETF has a high trading volume it means it possesses high liquidity, and vice-versa. It is always best to invest in Mutual Fund schemes having high liquidity. This ensures your funds are easily accessible during emergencies.

Note the expense ratio

The expense ratio is the fees charged by the fund house to make and manage the investment. The expense ratio varies for every fund house and the fund type you invest in. Generally, ETFs have a low expense ratio. However, you should reach out to your fund house and enquire about them. The lower the expense ratio the better it is.