What is an ETF?
EXCHANGE TRADED FUND ie ETF is like a BASKET OF SECURITIES which trades like common stock in STOCK EXCHANGE. An exchange-traded fund (ETF) is a form of security that includes a set of securities—such as stocks—which often follow an underlying index, even if they invest in any number of industry sectors or use various strategies.
Investing in ETFs is a great option for both private stock trading and mutual funds investment, ETFs invest in the same stocks in the INDEX of a stock exchange in the same proportion as the ratio in which different stocks are included in that index have been done,
Eg – NIFTY 100 is an INDEX, and thus NIFTY 100 ETF is a fund based on Nifty index, which will invest only in any of the 100 stocks included in NIFTY INDEX, and the ratio in which a stock is included in Nifty 100 index, the money of the fund in the same proportion, will be invested in that stock. And thus the fluctuation in Nifty 100 ETF will be in the same proportion as the index of Nifty 100.
An ETF is LISTED mutual funds like a stock market share, which is traded on a daily basis. invest in ETF
At the end of the day in the normal mutual fund, the NAV is calculated on the basis of the stock price or the valuation of the UNDERLYING ASSET, and the mutual fund is bought and sold on the BASE of that NAV. But with the facility of ETF, you can buy and sell that ETF based on the price going on in the stock market in REALTIME, if there is a 5% fluctuation in the market someday, then when the price is low then only the investor can buy that ETF, and as soon as the price goes up, he can make a profit by selling it.
Now, let’s talk about,
Similarities between ETF and mutual funds.
- EXCHANGE TRADED FUND is like a mutual fund that invests the money taken from investors in shares of a particular index or another Asset class.
- Just as you are able to take advantage of investing in a diversified portfolio by making small investments in mutual funds, similarly, investing in ETFs also gives you the benefit of such a DIVERSIFIED portfolio.
Some differences between ETF and Mutual Funds,
- We can buy and sell ETFs at real-time stock market prices, whereas we cannot do DAY TRADING to the normal mutual fund, and in this, we have to buy and sell at the price of NAV only.
- The fees incurred on investing in ETFs are less than the expenses incurred in any other general mutual fund.
- We have to pay brokerage fees both at the time of buying and selling ETFs, while on buying mutual funds we have to pay EXIT FEES and to manage the fund, we also have to pay mutual fund fees.
- You do not need DEMAT ACCOUNT to invest in a general mutual fund, but you need a trading and DEMAT account to invest in ETFs.
- General Mutual Funds cannot be sold and bought in the stock market, but ETFs can be bought and sold on the stock market just like any stock.
- A mutual fund is invested in stocks by a fund manager after doing a lot of research in the ACTIVE way, thus a normal mutual fund is an ACTIVELY MANAGED FUND.
Now the point is,
How to invest in the ETF?
Suppose you want to buy the country’s most popular ETF GOLDMAN SACHS NIFTY BeEs, So you will have to order your broker to buy GS NIFTY BeEs ETF, and the broker will buy from the stock and once the transaction is complete, that ETF will come to your DEMAT ACCOUNT, but the stock coming into this ETF is owned by Goldman Sack, which is called the sponsor of ETF.