What are mutual fund ETFs, how to invest in these schemes

ETFs or exchange traded funds are mutual fund schemes that are traded on the stock exchange. These are generally passively managed funds that follow /replicate a particular index and are best suited for those who want to be invested in the particular index stocks. Unlike the normal process of investing in mutual funds, there is a slightly different procedure to invest in ETFs.

Pre-requisites
To invest in an ETF one needs to have the following:

• A demat account with any Depository Participant (DP).
• A trading account with the broker KYC process needs to be completed at the time of opening both these accounts.
• Some banks offer 3 in 1 accounts where bank account, demat account and trading account are opened in one go, using a single form.

Purchasing ETFs
Unlike buying mutual funds where an application form needs to be filled up, one can purchase an ETF by placing a buy order with the broker telephonically or through the online trading system of the broker. The market price at which the ETF is bought is dependent on demand and supply factors and may be slightly different from the end of day NAV published by the fund house.

Types of ETFs
There are different types of ETFs available for investments. Index ETFs that replicate the stock indices such as Nifty, Midcap index etc, Commodity ETFs such as gold ETFs, International ETFs that replicate some international index, debt ETFs that replicate a debt index.

Point to note

• Unlike investing in stocks, investing in an ETF allows exposure to a bucket of stocks comprising the index, thereby diversifying the risk.
• Since ETFs are passively managed funds, they have a relatively low expense ratio.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)