What is an Exchange Traded Fund?

An Exchange Traded Fund or ETF is a basket of stocks that mirrors the composition of an Index, like the BSE Sensex, Nifty 50 or S&P CNX Nifty. The ETF or an Exchange Traded Fund is traded on stock exchanges, just like stocks. These are a great investment opportunity for seasoned, as well as retail investors. ETFs allow the investors an exposure to the entire stock market in different sectors and sometimes even internationally at an affordable investment structure.

How does an Exchange Traded Fund work?

For trading in an Exchange Traded fund (ETF) you will need a Demat account and a Trading account. The Exchange Traded Funds track an underlying index and do not require active fund management. This is the reason why Exchange Traded Funds have very low administrative and management costs when compared to an actively managed mutual fund. The assets underlying an ETF are owned by the fund provider, who monitors its performance and distributes profits to investors as per their invested amount on a pro-rata basis.