What is an ETF?
An ETF (Exchange Traded Fund) (ETF) is a fund that tracks the performance of a commodity, an index, bonds, etc., based on its underlying assets.(currency, gold, crude oil, futures, options, etc). Some ETF’s provide the investors with the choice to redeem the shares or price of commodities in lieu of money on maturity and this is more beneficial for those who wants to trade in gold (Read : Benefits of Gold ETF)
How is it different from mutual funds?
- ETFs trade like that of a stock exchange, which is not the case with Mutual Funds.
- They have lower fees than Mutual Funds
- The price varies throughout the day for ETFs, unlike that of MFs, where the NAV is calculated at day-end.
Advantages of ETFs
- They are traded throughout the day
- They offer diversification and manages the risk well
- The cost of ownership and transactions are low
- They are beneficial from taxation point of view as well.
ETFs are exposed to the following risks
- Tracking error (the fund manager may not be able to track the benchmark efficiently)
- Business risk (any of the poor-performing holdings will affect the whole portfolio)
- Market risk (the time when you require the fund may not be favorable to the market)
