Exchange-Traded Fund (ETF)

An Exchange-Traded Fund is a type of pooled investment fund that may invest in stocks, bonds, commodities, or other assets.

Like a mutual fund, it collects money from many investors and uses that money to hold a portfolio of securities.

The key difference is that ETF units are bought and sold on a stock exchange during market hours, just like shares.

An ETF may track:

• A broad market index such as the Nifty 50
• A sector or theme
• Government or corporate bonds
• Gold or other commodities
• International markets

Many ETFs are passively managed and aim to follow an index, but some ETFs are actively managed.

The market price of an ETF can move throughout the day based on demand and supply. This price may differ slightly from the value of the underlying portfolio.

ETFs can offer diversification, transparency, liquidity, and relatively low costs.

However, investors may face market risk, trading costs, tracking error, and bid-ask spreads.

In India, investors generally need a demat and trading account to buy and sell ETFs on the exchange.

Getting Diversified Exposure Through One Trade

Arjun wants exposure to large Indian companies but does not want to buy many individual stocks.

He invests ₹1 lakh in a Nifty 50 ETF through his trading account.

By buying units of the ETF, he gets exposure to the companies represented in the Nifty 50 without purchasing each stock separately.

If the index rises, the ETF should broadly benefit. If the index falls, the ETF will also generally decline.

Arjun can also sell his ETF units during market hours whenever there is sufficient liquidity.

This gives him diversified market exposure with the flexibility of exchange trading.