An ETF, or exchange-traded fund, is a type of investment fund that trades on a stock exchange. ETFs are similar to mutual funds, but they have some key differences. In this post, we’ll take a closer look at What is ETF Fund and how they work.
What is ETF Fund in the Market?
These are exchange-traded funds. In an earlier article, you learned What Mutual Funds are and How they work. In mutual funds, The company takes funds from you and invests in stocks and shares.
Then they open a NAV and sell one unit to you. This NAV now Rises and Falls. ETFs are quite similar to mutual funds but like stocks, these are listed on the Stock exchange.
When a mutual fund company has more than 40 to 50 stocks, They make them into ETFs, and these ETFs are now listed on the stock exchange. You can buy and sell these, just like stocks.
Many companies come to you with their ETFs, such as Nippon and Motilal Oswal. ETFs are generally made from those items which are not present in the physical form. These could be AMC or Asset Management companies without assets in a physical form.
Where are ETFs traded?
Now let’s understand how and where ETFs are traded:
Actually, these are listed on the stock exchange like stocks there are many things that you can do with them such as:
- Buy or Sell
- Short selling
- Taken margin
- Settlement method also T+2 days.
- Handled like a stock.
- Manage as you Handle the Stock.
When you buy a mutual fund, You only get to know its NAV in the evening, Whether it has risen or fallen as per the market.
The ETFs are slightly different. They are listed on the exchange and go up and down according to the market. They are entirely dependent on demand and supply.
How does ETF work?
The ETF of Bank Nifty ETF will be like the Bank Nifty BeES. The rate of this will be around the Bank Nifty.
However, an equal price is not possible. This is due to the reason that is demand and supply is the real rate decider.
You can keep this in delivery. You will have to cut this on the basis of the future expiry.
For Example,
Now let’s say Chirag wants to avail of NIFTY for 3 years. He has to do this in the future only and every month has to roll this over as well. That is, He has to cut these months and buy it the next month.
The Bank BeES is a Bank ETF fund of Goldman Sachs, The objective of which is two correspond the total returns of the Bank Nifty index. An investor who wishes to diversify his portfolio and wants to invest in the top banks of the Indian economy can do so by investing in the Bank BeES ETF.
However, This is not possible that Chirag will keep renewing this for the next three years every month. It is possible that you could buy Nifty BeES and put it in his Demat account as soon as Bank Nifty goes up his ETF will also go up or come down according to the market conditions.
Now, Chirag redeemed all his cash from the ETF and has bought it. With this action, He has safeguarded himself for the future. You have now understood how ETF works.
Benefits of ETF Fund
Let’s go over the advantages of investing in ETF:
- No worries about the expiry.
- No tension for rollover
Many ETFs are listed like Bank BeES & Nifty BeES.
Many companies have stocks in the ETF. Rather than buy stocks from each company, It is preferable to buy its ETF and put this in your Demat account. If the company performs well its stock will go up and If the performs adversely, It will go down.
ETFs are actually very similar to Mutual Funds. In both, you calculate a unit. The biggest benefit of ETF is that you can buy and sell it anytime as well. You can buy and sell it like stocks.
- Low Cost
- Low Brokerage
In mutual funds, you pay the exit load but an ETF, you don’t have to. The managers also have their fees. However, these work just like stocks, and you only have to pay the brokerage fees. ETF, In itself, is a very profitable deal.
Also Learn: What is Financial Market and How Financial Works?
Also Learn: What is Stock Market: A Beginner’s Guide
Commodity ETFs and their benefits
When you buy Gold or Silver, there can be an issue with them. The biggest fear is that they can be stolen, If you want to keep these, You have to store them very carefully and safely but In ETF, If you take a gold ETF, then the price of this will be linked with gold.
The ETF rate goes up and down according to the price of gold. The biggest benefit of this is that you don’t have to take care of this. Rather, you can keep the gold ETF in your Demat account for five years. There are two more ways to keep gold apart from the gold ETF.
Buy gold ETF future:- However, the issue that comes with this is that every month you have to do its rollover.
Buy from Jeweller:- Eventually, the same issue with this is about how to preserve these carefully. However, In Gold ETF, you don’t have to take care of these. They will be safe in your Demat account.
Most Popular ETF
Here are some names of ETFs for your information:
- Nippon India ETF Nifty BeES
- Nippon India ETF Bank BeES
- Motilal Oswal Midcap 100
- Motilal Oswal Nasdaq 100
- HDFC Gold Exchange Traded Fund
- UTI Gold Exchange Traded Fund
- UTI Sensex Exchange Traded Fund
Action Plan
- Choose 5 ETFs from this list above.
- See ETF Returns of the past one year, three years, and five years.
- After this, You will come to know whether it is a profitable deal to invest in these ETFs or not.
Now, We hope you have a good understanding of What is ETF Fund and how ETF works.
