Investment School: What are Exchange traded funds?

What are Exchange traded funds?

Of late ETF(Exchange traded fund) has gained more attention among the Indian investors. So what is all about ETF?

What is ETF?

ETFs are mutual fund schemes whose units can be sold or bought in the stock exchanges during the regular trading hours. They do not have cut off timings like other mutual funds for buying or selling units. You need a demat account to operate with ETF.

Types of ETF

Passive ETFs - These mutual funds mirror a index and invests in a same set of stocks which comprimises an index. It is similar to index funds.

Active ETFs - These funds invest in a set of stocks that pertain to the mandate of the fund.

How ETFs work?

1. ETF units have two prices - market price and NAV. So usually market price of ETF unit will be at discount or premium to underlying NAV.

2.Investor does not deal directly with mutual fund company for purchase of units, he purchases the units via stock exchange.

3. Direct purchase of units from mutual fund company is done by high net worth individuals or institutions, because the minimum number of units to be purchased will be very high and not affordable by retail investors.

4.By using arbitrage methods, mutual fund company tries to keep the difference between NAV and market price to minimum.

Advantages of ETF

1.ETFs are cheaper than index funds. They have a expense ratio of 0.5 to 1% compared 1.5% of index fund.

2.They can be bought or sold during any time of the trading hours unlike mutual funds where u can purchase only at a NAV which is calculated at end of day.

3. They mimic the performance of underlying index better than the index fund.


1. You need to have a demat account and trading account to operate in ETF whereas in mutual funds you just need a pan card to invest.

2. You have to pay a brokerage of 0.5%-1% for trading via broker like icici direct,sharekhan etc.

Who can invest?

1. Investors who want to mirror the performance of benchmark indices.

2. Investors who want to invest in asset classes like gold.

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