Almost everybody who is involved in the stock market, in one way or the other, would accept its uncertain environment. In other words, you can say that nothing is predictable in the markets. If you have made 10,000 rupees today, you cannot say with full conviction that you will be able to make the same or more tomorrow. Also, if you have made money in one stock, nobody can assure you that the same stock will give you money in your next trade. Still traders take unbearable risk and bet in the stock market. Most of them lose, not just in day trading but also in investing.

Why Do Investors Lose?

We can understand that day trading is a different genre and it involves heightened risk due to volatile intraday movements. But what will raise your eyebrows is the fact that not many investors make enough money in the market. There could be many reasons behind this -- bad investment; lack of patience or poor trade management.

Perhaps most investors lose due to their poor choice of stocks. It is because most individuals or retail traders are not in a position to analyze and make selection of the best stocks for their portfolio. The reasons could be lack of knowledge or time constraints etc.

How Can Investors Make A Better Choice of Stocks?

The best option for an investor is to select Index (Nifty50 or Sensex30) stocks for their portfolio. For that the investor has to buy all the stocks comprised in an index for his portfolio. By doing so your portfolio will replicate the index itself. Let me call this manual mode of Index investing. But wait! this manual method is not short of caveats.

Does Buying All Index Stocks Solves the Problem?

Perhaps yes but only to some extent. No doubt the investor has bought the best of the lot yet this method is not short of troubles. Let’s see how.

Firstly, the investors will have to buy the shares of all the companies present in an index say Sensex. Now each stock has a different weightage in an index, so the investor will also have to take that into account while buying. For example, he will have to buy more shares or Reliance Industries than say Mahindra & Mahindra because the former has more weightage than the latter. Although its easier to find the weightage by simply googling about it, yet there is another problem.

Most retail investors have small initial capital. Now say, an investor wants to invest 10,000 rupees then he would not be able to buy all the stocks comprised in an index. A Reliance’s single share would cost around 2500 rupees. How will he be able to give more weightage to Reliance in his portfolio. But what if our investor has more capital say, 10,00,000 rupees. Will it solve the problem?

Even if he adds all the Sensex30 shares in his portfolio according to their weightage, there is a problem. The weightage of the companies keeps on changing according to their price -- the price which reflects the face value of the performance of a company. If a company performs well, it would catch investors’ interest, its price would go higher and so do its weightage. So, the investor has to manually do the process. He will have to buy more shares of a company whose weightage has increases and reduce the number of shares if the company’s weightage has decreased.

Sensex has given 2300% returns from September 2001 till October 2021. Even if you would have bought Sensex30 stocks 2001, you can not expect the same returns from your portfolio due to the weightage effect. Many companies would perform poorly and their price will go down. This will reduce their weightage. Many of them would slip out of Sensex and replaced by new companies. The investor will have to take this factor into account and make changes in his portfolio whenever necessary, otherwise his good investments may turn out to be poor investments.

Due the above reasons, manual mode of index investing might still be an awkward task for most of the investors.

So, is there an easy option? Definitely, the Index Exchange Traded Funds (ETFs) can be a viable option.

What Is Meant by Exchange Traded Funds (ETFs)?

An (equity) ETF is a basket of stocks that reflects the composition of an index like Sensex. The price/value of an ETF is determined from the net asset value of the stock comprised in an index. Various mutual funds provide their ETF products that attempt to replicate the indices.

Types of ETFs

There are four types of ETFs listed on NSE-

1. Equity ETFs
2. Gold ETFs
3. World Indices ETFs
4. Debt ETFs

BSE classifies its listed ETFs as-

1. Equity ETFs
2. Gold ETFs
3. Liquid ETFs

Equity ETFs are the index ETF as discussed above. Gold ETFs are the special types of exchange traded funds that track the price of Gold. Liquid ETFs are the Money Market exchange traded funds.

Advantages of Investing in ETFs

ETFs may help investors in solving many problems.

1. They don’t need to analyze the stocks fundamentally or technically in order to make selections for their portfolio. Because the ETF would replicate the best companies.
2. The investor needs not to buy the shares of all the companies present in an index. He just has to buy the Index ETF only and that’s it.
3. An investor can invest as much money as he likes as the price of an ETF is much less than the price of the index that it represents. For example, the price of Nippon India ETF Nifty Bees is around 194 while Nifty index has been trading near 17900. Unlike index futures, where one has to buy fixed lot size, an investor can buy even one unit of ETF if he likes.
4. As the ETF is representing all the stocks present in an index, the investor does not have to worry about shuffling his portfolio on the basis of the dynamic weightage of the stocks. The weightage will be automatically adjusted in the ETF itself.

Beside the advantages mentioned above, the ETFs provide returns as close to the indices, that they represent, as possible.

How to Buy ETFs?

In order to deal in ETFs, you need to have a trading account with a registered broker. You also need to have a Demat account.

ETFs are listed on the exchange and are traded just like shares. One can buy ETFs either from the broker’s online terminal or through telephonic mode. The purchased ETFs will be transferred to your demat account. You can keep them as long as you like.

That’s it for today. We will be back with more educational articles in the coming days.

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