Introduction:

India paisa would like its customers to know about another exciting way of investing in the stock markets without having to spend a lot of time in the market. This type of investing is called passive investing. The funds which provide this type of investing opportunities are called passive managed funds. Exchange Traded Funds (ETF) is a popular form of passive managed Funds.

Let us illustrate it to you with an example. Consider yourself a scenario where the BSE Sensex went up by 500 points one day but the stocks you own still went down. ETF’s were formed to avoid these kinds of market risks. In the course of the article, we shall explain how ETF’s avoid these kinds of market risk.

Exchange Traded Funds (ETF) is just a collection of stocks which can be traded like an individual stock. ETF’s were started in 1993 in USA. It took several years for investors to take notice of these Funds. However, lately these have become more popular than the traditional Mutual Funds in the USA. In India, however ETF’s are still not as popular as the Mutual Funds.

In simpler terms, ETF can be defined as a Mutual Fund which can be traded like a stock. An ETF represents a collection of stocks which form the basis of an index like the Bombay Sensex. In simpler terms, an ETF will invest in all the shares which form the Bombay Sensex in the same way the Sensex calculates the market sentiment in the form of Bombay Sensex index popularly known as BSE Sensex. This allows an individual investor the value of his ETF by just looking up the Sensex value at real-time.

ETF differs primarily from a Mutual Fund in that ETF’s value or popularly known as NAV (Net Asset Value) can be known at any time of the day unlike a Mutual Fund’s NAV which will be calculated at the day’s trading. ETF tries to imitate the performance of the index as closely as possible.

Investors could have a diversified portfolio by just buying an ETF as most of the Indian indices are pretty diversified indices. Since the ETF for all practical purposes behaves like a stock, the commissions for trading ETF’s are also low.

Conclusion

ETF is a popular form of passive investing which provides a lot of value for retail investor’s investment with minimal risk. ETF, in short can be known as the combination of the positive elements of a Stock and a Mutual Fund. India Paisa hopes that our customers understood the basic definition of an Exchange Traded Fund. In later tutorials, we shall explain more about ETF to provide a clearer picture as to how ETF presents the positive elements of a Stock and Mutual Fund.