What is an ETF? Meaning, Benefits, and Risks Explained

What is an Exchange-Traded Fund (ETF)?

An Exchange-Traded Fund (ETF) is a type of investment fund that combines features of both mutual funds and stocks.

Here's how it works:

  1.     Like a mutual fund, an ETF pools money from many investors to invest in a collection of assets - such as stocks, bonds, or commodities.
  2.     Like a stock, an ETF is listed on the stock exchange and can be bought or sold anytime during market hours at market prices.

Pros of ETFs:

  1.     Low cost: ETFs generally have lower management fees.
  2.     Real-time trading: You can buy and sell anytime during market hours.
  3.     Diversification: One ETF gives you exposure to a basket of securities.
  4.     Transparency: Most ETFs disclose their holdings daily.

Cons of ETFs:

  1.     Requires a demat account: You need a trading and demat account to invest.
  2.     Market volatility: Prices can fluctuate throughout the day like stocks.
  3.     Low liquidity risk: Some ETFs may have lower trading volumes, making them harder to buy or sell quickly.

Example:

A Nifty 50 ETF invests in all 50 companies of the Nifty 50 index.
So, by buying just one ETF unit, you're investing in all those companies at once.

    • Related Articles

    • How is an ETF structured?

      An Exchange-Traded Fund (ETF) in the Indian stock market is structured as a pooled investment vehicle that holds a basket of securities such as stocks, bonds, or commodities. It is designed to track the performance of a specific index, sector, or ...

    • How does an ETF track an index?

      An Exchange-Traded Fund (ETF) is a type of investment fund that aims to replicate the performance of a specific market index, such as the Nifty 50 or Sensex. In India, ETFs are regulated by the Securities and Exchange Board of India (SEBI) and are ...

    • What is an ETF’s Net Asset Value (NAV)?

      An Exchange-Traded Fund (ETF) has a Net Asset Value (NAV), which represents the total value of its assets minus liabilities, divided by the number of outstanding units. NAV is calculated at the end of each trading day and helps investors understand ...

    • What factors should I consider when choosing an ETF?

      Selecting the right Exchange-Traded Fund (ETF) isn’t just about returns—it’s about aligning your investment with your financial goals. Here’s what to keep in mind: 1. Define Your Investment Objective & Asset Class Decide whether you need equity, ...

    • What are the costs associated with ETF investing?

      While ETFs are known for being low-cost investment options, there are still a few important charges to keep in mind: 1. Expense Ratio This is the annual fee charged by the ETF provider to manage the fund. It's usually very low for ETFs (often less ...