What are ETFs?

: Exchange Traded Funds (ETFs) are essentially open-ended funds that are listed and traded on exchanges like stocks. Most equity ETF replicate a stock index. When one buys a unit of an ETF, one is taking exposure in that index. The returns of that particular ETF will be more or less in tune with the returns offered by the index. NAV of one unit of an ETF is normally kept in proportion of the index level. For example, indicative NAV of Nifty BeES is around 1/10th of the Nifty index. How does an ETF work?: An ETF works in different way then a normal open-ended mutual fund index. Retail investors generally buy/sell ETF units in secondary market through stock exchanges. There are some stock brokers called authorised participants (AP) designated by the fund provide liquidity in ETF on the secondary market. They can create/redeem units directly from the fund in primary market by exchanging defined basket of index securities for specified number of units. The constitution of this basket of securities is generally in line with the composition of index. Large institutional investors also can create/redeem units in primary market directly with the fund in the same manner. What are benefits of ETFs over normal open-ended index funds? ETFs offer several advantages to investors over normal index funds: - They can be easily be bought/sold like any other stock on the exchange through NSE terminals across the country While for purchasing normal index fund one needs to fill up a form and submit it to the nearest service centre designated by the fund. They can be bought/sold anytime during market hours at a real time price close to the actual NAV of the scheme, while normal index fund can be bought at the end of the day NAV only. For new or redeeming ETF units, the investor who is initiating the action pays all transaction cost, the fund does not incur any cost for such transaction, which means there is no burden of such transaction cost to the long-term investors in the fund. While in normal index fund long-term investors end up subsidising transaction costs incurred by fund to respond to the flows initiated by the short-term traders. Ability to put limit orders. Minimum investment is one unit (approximately Rs 370 for Nifty BeES) while for index fund it is generally Rs 5,000. Lower total expenses and better tracking of index