Things to know about ETFs (Exchange Traded Funds)

What are ETFs?

An ETF (Exchange Traded Fund) is a mutual fund scheme that invests in securities in the same proportion as an index of securities and the units of exchange traded fund are listed and traded on exchange platform. Therefore, it’s units can be easily bought and sold on a stock exchange in a manner like a share.

The open-ended mutual fund schemes offer liquidity through allowing transactions on all business days. ETFs go one step further, offering intra-day liquidity.

These units can be bought through the stock exchanges with the help of member brokers. The investor also needs to have an account with the stock broker, a member of a recognized stock exchange in order to be able to put the transaction orders. One also needs to have a demat account for this purpose as the units purchased through stock exchanges are delivered only in demat format.

Most ETFs are passive funds in nature. The ETFs being passive would offer portfolios that mirror an index, which allows for a feature unique to ETFs among all mutual funds – a real time NAV. Let us say, an ETF tracks Nifty index. In such a case, the real time NAV of the ETF would be closely tracking the price movement of index. In India, ETFs are available for Indian equity, international equity, bonds, and commodities.

So long as an ETF is passive, the expense ratio is very low. However, the possibility of active management cannot be completely ruled out. Having said that, it may lose the major benefits that ETFs offer, e.g. real-time NAV, trading price being close to the NAV, low cost, etc.

In summary :Five Things to know about ETFs.

1.Units of these funds are listed and traded on stock exchanges like stocks. An account with the stock broker and a demat account are compulsory to investment in units of ETFs.

2.ETFs can be traded on real-time basis and the NAV is likely to closely track the movement of the index value.

3.In India, ETFs are available for Indian equity, international equity, bonds, and commodities.

4.ETFs can have lower tracking error and expense ratio even as compared to open-ended index funds.

5.Due to the low costs of these category of schemes and availability of a wide range of options, many advisors globally prefer ETFs for the purpose of achieving target asset allocation.

An Investor education and Awareness initiative of Aditya Birla Sun Life Mutual Fund

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully