An exchange traded fund or ETF is a fund that is listed and traded on the stock exchange. It 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.
Types of ETFs
ETFs typically track and replicate a particular market index just like index funds. It 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. ETFs are launched by asset management companies just like other mutual fund schemes.
To be able to invest in ETFs, one needs to 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 an investor to manage investments in an effi cient manner at one place. The account can be opened by fi lling up a form and submission of KYC documents.
Process to invest
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.
Points to note
- An ETF is a passively managed fund and hence has a lower fund management fee as compared to an actively managed mutual fund scheme.
- 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.
(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)