For a person who is starting to invest in stocks, it would be good idea to start off, with exosure to the stocks that are part of the an Index Thought it would be good, to expain about a different animal called ETF at this point , which has the flexibility to be bought on the exchange in realtime at the prevaling NAV ,but at the same time has the functioning capabilities of a Mutual Fund (Since you buy units ). Though not so popular yet with investors , would highy recommed investor to have an exposure to these instruments, may be not the sectoral ones but definitely the index based ones .
How do these ETF work :
These are similar to a MF in that , there is a Asset Management Company (AMC) which manages this traded fund . But unlike a MF , where all new purchases and redemption by the investor is done with the asset management company , here the Investor can buy and sell unit on the stock exchange ( hence the name Exchange Traded Fund ) and hence the advantage is ,Investor need not have to wait for the end of trade to figure out the NAV of the unit , since NAV changes realtime , based on the price movement of the underlying stock .
Pros:
1) Investor can buy/sell , any time there is a dip/spike in the market , without having to wait for the end of trade .
2) The fund expenses are less than expenses of a Index funds currently avaliable in the market
3) The NAV of the unit does not change even in case a "Big Investor" sell his entire holdings , as the units are not redeemed by the AMC , but rather sold to someother investor through a market trade
Cons:
1) Investor would need a demat account and a broker ( or a online trading account ) to buy ETFs
2) There needs be buyers in the market , when the investors intend to sell his units , as the AMC does nor redeem it .
How do these ETF work :
These are similar to a MF in that , there is a Asset Management Company (AMC) which manages this traded fund . But unlike a MF , where all new purchases and redemption by the investor is done with the asset management company , here the Investor can buy and sell unit on the stock exchange ( hence the name Exchange Traded Fund ) and hence the advantage is ,Investor need not have to wait for the end of trade to figure out the NAV of the unit , since NAV changes realtime , based on the price movement of the underlying stock .
Pros:
1) Investor can buy/sell , any time there is a dip/spike in the market , without having to wait for the end of trade .
2) The fund expenses are less than expenses of a Index funds currently avaliable in the market
3) The NAV of the unit does not change even in case a "Big Investor" sell his entire holdings , as the units are not redeemed by the AMC , but rather sold to someother investor through a market trade
Cons:
1) Investor would need a demat account and a broker ( or a online trading account ) to buy ETFs
2) There needs be buyers in the market , when the investors intend to sell his units , as the AMC does nor redeem it .
