ETF (Exchange-Traded Fund)
Full form: Exchange-Traded Fund
ETF stands for Exchange-Traded Fund. It is a fund that holds a basket of investments, most often the shares in an index such as the Nifty 50, and whose units are bought and sold on the stock exchange during trading hours, just like a share.
How an ETF works
A fund house creates an ETF to follow something, such as an index, gold or a group of bonds. It holds the same investments, so the ETF's value moves with them. You buy units through your broker into your demat account, at the price shown on the exchange at that moment.
ETF, index fund and mutual fund
An ETF and an index fund can follow the same index, but you buy them differently. An ETF trades on the exchange at a live price and needs a demat account. An index fund is bought from the fund house at the day's NAV and can be bought through a SIP. Both are run by fund houses under SEBI's mutual fund rules.
Costs and prices
ETFs usually charge a low yearly fee, called the expense ratio. Because they trade like shares, the price you pay can differ slightly from the fund's NAV. An ETF that few people trade can have a wide gap between its buying and selling prices, so it is worth checking how actively it trades.
What an ETF does not remove
An ETF follows its index up and down. It spreads your money across many companies, but it does not protect you from a falling market, and it does not promise a return.
Buying an ETF (hypothetical numbers)
Suppose one unit of a Nifty 50 ETF trades at ₹250. With ₹2,500 you can buy 10 units through your broker during market hours, and you own a small slice of all 50 companies in the index.
If the index rises by 1% that day, the ETF's price should rise by about 1%, apart from small costs and tracking differences.
Common questions
- What is the full form of ETF?
- Exchange-Traded Fund.
- What is the difference between an ETF and a mutual fund?
- An ETF trades on the exchange at a live price and is bought through a broker with a demat account. An ordinary mutual fund is bought from the fund house at the day's NAV.
- What is the difference between an ETF and an index fund?
- Both can follow the same index. The ETF trades on the exchange like a share, while the index fund is bought from the fund house at NAV and can be invested in through a SIP.
- Do I need a demat account to buy an ETF?
- Yes. ETF units are bought on the exchange and held in your demat account.
- Are ETFs safe?
- They are market-linked, so their value rises and falls with what they hold. Holding many companies spreads risk but does not remove it.