All about ETF (Exchange Traded Funds)

What is an ETF?

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A basket of stocks trading over stock market :money_with_wings: :money_with_wings:

ETF refers to exchange traded fund. It is traded just like a stock over stock exchange but shares the characteristics of a Mutual Fund. It can be thought like a basket of securities that trade on the stock market. It is seen as a great investment tool for investors with limited expertise in the stock market.

How do Exchange Traded Funds (ETFs) Work?

ETFs are traded in the stock market in the form of shares produced via creation blocks. ETF funds are listed on stock exchanges and can be bought and sold during the trading hours in the market.

Changes in the price of an ETF depend on the costs of the underlying assets present in the pool of resources. If the price of one or more asset rises, the share price of the ETF rises proportionately, and vice-versa.

The value of the dividend received by the share-holders of ETFs depends upon the performance and asset management of the concerned ETF company.

ETFs can be actively or passively managed. Actively managed ETFs are operated by a portfolio manager and portfolio manager decided where to invest the funds within the fund resource pool. Passively managed ETFs try to mirror the price trends of specific indices.

Advantages of ETFs

  • Purchasing shares of a single company keeps you limited to the performance of that company, ETFs allow you to keep your finances spread over equities of different companies – diluting your risk significantly.

  • Benefits over Mutual Funds – One of the significant benefits of investing in an ETF over mutual funds is the reduced expenses. There are various charges involved in mutual funds, such as entry and exit load, management fees, etc. This increases your total cost incurred, and thereby the total expense ratio of mutual funds. As ETFs are traded like shares in the stock market, its expense ratio is considerably lower.

  • ETFs can be sold instantly on the exchange during trading hours while mutual fund redemption takes some time.

How to invest in Exchange Traded Funds (ETFs)?

You will need a demat account to invest into ETFs. You can invest using Niyo Money Stocks & ETFs section feature once your demat account is active.

Happy investing!

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