Aditya Birla Sun Life AMC Limited

What is ETF?

An ETF is a basket of stocks that reflects the composition of an Index, like the Sensex or the Nifty. ETF prices reflect the net asset value of basket of stocks in which it is investing. In many ways, it is similar to mutual funds. Exchange Traded Funds (ETFs) are actually Index Funds that are listed and traded on exchanges like stocks and are passively managed. Mutual funds aim to generate alpha by outperforming a market benchmark, whereas ETFs aim to track the relevant index and replicate it returns. To invest in ETFs you need to have demat and trading account with a stock broker

Why ETF?

ETFs have several advantages over traditional open-end funds. The 4 most prominent advantages are trading flexibility, portfolio diversification and risk management, lower costs, and tax benefits.

Who is it best suited for?

Ideal for investors looking to take exposure in equity, these funds are apt for investors with long term goals like wealth creation at a very low cost. ETF’s could also help investors participate in equity without any bias of Fund Managers track record or experience as this gives a braoad exposure of a particular index. ETF’s could also used for diversifying one’s portfolio across index with exposure to only systematic Risk. Investors having a DEMAT Account looking to invest lumpsum amount in equities could use ETF’s for the most Simplistic way of taking exposure in the asset class.

How ETF’s work?

Exchange Traded Funds or ETF’s is fund that can be traded in the Exchange like a stock. This gives a way to buy or sell a complete basket of a Index without having to buy all the components Individually. The Fund House owns the underlying asset / Index by creating a Fund to track their performance and to buy complete basket on behalf of investor to that fund. Investors own a portion of the ETF, but they don’t own the underlying stocks. ETF’s are designed to track the value of the underlying asset or Index be it a commodity like Gold or an Index like Nifty- they trade at maket determined Price. There is a small difference in long term returns of the asset class or Index and an ETF due to underlying Expenses.