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what is an etf?

Wednesday, Mar 13 2019 8:38AM

What is an ETF?

Imagine you want to buy a car. The salesman in the showroom shows you different types of cars, highlighting their features. One car offers amazing speed while another offers great mileage. But what if you wanted a car that was very fast and offered great mileage too? In other words, what if you wanted something extra from a regular deal?



In the investing world, an Exchange Traded Fund (ETF) offers you that ‘something extra’.



What is an Exchange Traded Fund?
An ETF is a type of mutual fund that can be traded on the stock exchange like an individual stock.



As the name suggests, an exchange-traded fund can be bought and sold directly from a brokerage account. An ETF can represent securities, commodities, and index funds. The best part is, unlike regular mutual funds, you can buy and sell ETFs at any point in time on the stock exchange.



The introduction of ETFs has opened up a new way for retail investors to gain better exposure to the stock market in real time. It also comes at a lower cost than many other forms of investing.



How to invest in ETFs?
You can invest in ETFs through the following methods:



You can make a telephonic call to your broker and place your trade order
You can also do the same through an online terminal right at your home or office. All you need is a computer and an internet connection. Conducting ETF transactions is quite similar to investing in shares on exchanges through a trading terminal.


Advantages of investing in ETFs


Investment flexibility
It is as simple as trading in regular stocks on the stock exchange. This way, you can take advantage of any intra-day movements in the stock market. This feature is not possible for open-ended mutual funds.



Low fees
ETFs come with lower management fees. This is because the most common ETFs in India are Index ETFs. These ETFs are formed such that they mimic an index like the Sensex or Bank Nifty. Since the fund manager’s sole job is to rebalance the fund’s portfolio as per the index, the fees are lower.



In addition, operational and distribution expenses are significantly lower compared to other managed funds because they are passively managed. This makes investing in ETFs cost effective.



Diversification
Asset allocation can be a difficult task for retail investors given the costs and assets required. However, by investing in ETFs, you can gain a great amount of exposure to different groups of equities, sectors, and market segments.

This way, you can build a customised investment portfolio based on your financial goals and needs at a very low cost.


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