How Exactly Do ETFs Work?

An Exchange Traded Fund or ETF is an index fund that invests in a basket of assets (bonds, stocks, gold bars, etc.) and it tracks a benchmark index.

Investors can buy shares of an ETF and even trade these, through the day, at a stock exchange. An ETF is represented by a ticker symbol on the stock exchange and its intraday price is easily available to investors who wish to buy or sell its shares. To take advantage of this liquidity, an investor would require a demat account.

ETF holds the same assets as its corresponding benchmark index, avoiding the daily churn of assets and calls on which securities to buy and sell. The trading prices of ETFs are based on NAV (net asset value) of the underlying holdings that the fund represents and are usually, close to their actual NAVs. ETFs helps in spreading investment risk over a number of securities and can help in reducing any stock specific risk.

Managing these funds too is cost-friendly as there is less daily churn of assets and the investing style is also passive. For these reasons and more, ETFs tend to be favored by investors. 

An Investor Education Initiative.
Click Here to learn more about KYC requirements, SEBI registered Mutual Funds and grievance redressal.