Things investors must know about investing in ETFs – What is an ETF?

Updated: 03 May 2021, 04:14 PM IST

An exchange traded fund or ETF is a fund that is listed and traded on the stock exchange. ETFs are similar to index mutual funds but they trade just like stocks. An ETF is available for purchase from the fund house during the New Fund Offer (NFO) period. Post the NFO, the units of the fund are listed on the stock exchange for purchase and sale.

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ETFs can contain stocks, bonds, commodities, foreign currency, money market instruments, or any other security. An ETF can be a stock market index such as a Nifty ETF or a commodity index such as a gold ETF or the bond market in the form of a Bond ETF. An Index ETF is mainly a passive fund that allows investors to purchase a pool of securities in a single transaction.

Sector ETFs enable investors to take bullish or bearish positions in specific sectors. Currency ETFs allow the investor to participate in currency markets without buying a specific currency. Gold ETFs track the bullion performance.ETFs can contain stocks, bonds, commodities, foreign currency, money market instruments, or any other security. An ETF can be a stock market index such as a Nifty ETF or a commodity index such as a gold ETF or the bond market in the form of a Bond ETF. An Index ETF is mainly a passive fund that allows investors to purchase a pool of securities in a single transaction.Sector ETFs enable investors to take bullish or bearish positions in specific sectors. Currency ETFs allow the investor to participate in currency markets without buying a specific currency. Gold ETFs track the bullion performance.

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ETFs are launched by asset management companies just like other mutual fund schemes. An ETF is a passively managed fund and hence has a lower fund management fee as compared to an actively managed mutual fund scheme.

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Investment requirement

An investor must have a demat account with a depository participant as well as a trading account with a stock broker or sub-broker. One can opt to open a 3-in-1 account comprising a bank account, demat account and trading account which allows managing investments in an efficient manner at one place. The account can be opened by filling up a form and submission of KYC documents.

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Process of investing

Investments can be made by purchasing units of the desired ETF during the trading hours at market driven price of the ETF. Investors can give instructions to their broker to invest or can invest on their own using the online trading interface provided by the broker.

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ETFs trade throughout the day so there can be a difference in the price at which an investor buys the ETF during the day and the NAV of the ETF declared at the end of the day which is calculated on the basis of closing prices of securities comprising the ETF.

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Things investors must know about investing in ETFs – ​What is an ETF?

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