Understanding ETF's

Modified on Mon, 08 Jan 2024 at 03:29 PM

What are ETFs and how do they work?

Just like a mutual fund, an exchange-traded fund (ETF) is a pooled investment vehicle that holds a basket of securities like stocks, bonds, and commodities and trades on the stock exchanges. You can buy and sell an ETF anytime, just like a stock.

Like a mutual fund, it collects money from a variety of investors, appoints management, and calculates its Net Asset Value. An index is the most common target for ETFs. They invest in securities that make up the index in a way that mimics its results.

Read more about ETFs here


What is the difference between ETFs and mutual funds?

Feature

ETFs

Mutual Funds

Minimum Investment (Value & Quantity)


No fixed minimum investment value; 

Minimum investment quantity must be one unit.

Often has a minimum initial investment value and can be traded in fractional units as prescribed in the Scheme Information Document

Liquidity

Traded throughout the day within the market hours

Traded once a day, at the end of the trading session based on the fund’s NAV.

Availability


Trades on stock exchanges (NSE/BSE) like stocks.

Not traded on exchanges; transacted at NAV across various digital platforms.


Can I buy/sell ETFs throughout the trading day?

Yes, ETFs can be bought or sold throughout the day within market hours from the stock exchange(NSE/BSE).


Do I need a demat account to invest in ETFs?


Yes, it is necessary to have a Demat account while investing in ETFs.


What are the advantages of investing in ETFs?

Diversification: ETFs vary across asset classes like stocks, bonds, and/or commodities. This helps reduce risk through diversification 

Liquidity: Since ETFs are listed on leading stock exchanges, one can easily buy or sell them throughout the day ensuring liquidity.

Trading: Unlike other Mutual Funds, one can trade ETFs throughout the trading day.

Cost-efficient: Many ETFs aim to passively track an index, resulting in lower fees compared to actively managed funds.

Accessibility: ETFs make it easy to invest in different markets or themes without having to own each thing individually.


What are the different types of ETFs?

ETFs are broadly classified into 3 categories.


Equity ETFs:

 This type of ETFs follow regular stock indices like Nifty 50 or Sensex, wherein the ETF comprises the underlying index it tracks..

Example of Equity ETFs:

Market-cap-weighted ETFs that track indices like the Nifty 50, Nifty 100, Sensex etc. 

Debt ETFs:

These are typically focused on Securities and bonds issued by State and/or Central Governments ranging across different maturity profiles and interest rates.

Examples - Debt G-sec ETFs, Bharat bond ETFs, CPSE+SDL ETFs, Liquid ETFs

Commodity ETFs:

These ETFs make it easier for people to invest in different commodities including precious metals like Gold etc. without buying them directly (option of holding gold electronically instead of physical gold). The most common and liquid ETFs in this segment are Gold and Silver commodity ETFs.

Examples: Gold ETFs, Silver ETFs


What is the minimum investment required for ETFs?

The minimum investment required for ETFs (Exchange-Traded Funds) is the cost of purchasing at least one share of the ETF. Unlike some mutual funds that may have a minimum investment amount, ETFs are bought and sold on the exchanges like individual stocks. Therefore, investors can buy as few or as many units as they want, depending on the current market price of the ETF.


Are ETFs passively or actively managed?


ETFs (Exchange-Traded Funds) can be either passively or actively managed. It depends on the strategy behind the ETF. Zerodha Fund House will only launch passive ETF’s as we are focused on creating simple and transparent index funds and ETFs.


How are ETF prices determined?

ETFs can comprise a single stock/commodity or a basket of various asset classes. The price of the ETF is based on the underlying components accordingly. So, if the prices of the underlying components increase, the ETF price usually goes up too and vice-versa. It further depends on the market dynamics hence the trading price of an ETF depends on the demand and supply of the ETF in the market


Investors can use the Intraday Net Asset Value (iNAV) which provides an estimate of the ETF's net asset value based on the current market prices of its underlying securities.

Can I use SIP for ETFs?

The ability to enable SIPs in ETF varies from broker to broker. Brokers like Zerodha, Groww, Upstox, etc have an option to enable SIP in ETFs.


What happens if the underlying index performs poorly?

If the underlying index of an ETF performs poorly, the value of the ETF is likely to decrease as well. This is because the price of the ETF is closely tied to the performance of the assets in the underlying index. The ETF is designed to track the movements of the underlying index, so if the stocks or other assets in that index don't do well, it directly affects the overall value of the ETF. 

In simple terms, the ETF moves in sync with the underlying index, and a poor performance of the index generally results in a decline in the value of the corresponding ETF.


Is there any lock-in period for investing in ETFs?

No, there are no lock-in periods while investing in ETFs.



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