ETF

An Exchange Traded Fund holds a basket of securities — often mirroring an index, or holding gold or government bonds — and its units are listed on a stock exchange. You buy and sell units through a broker during market hours at the market price, rather than transacting with the fund house at the end-of-day NAV.

Why it matters

ETFs combine the diversification of a fund with the trading flexibility of a share. They usually carry low expense ratios, and their holdings are disclosed transparently.

How to read it

• Market price vs NAV. Because units trade on an exchange, the price you pay can be slightly above or below the fund’s indicative NAV. The gap is usually small for actively traded ETFs and can be wider for thinly traded ones.
• Liquidity. Check trading volumes and the bid–ask spread. A low-cost ETF that is hard to trade can end up costing more.
• Total cost includes the expense ratio, brokerage, the bid–ask spread and any premium or discount to NAV.

Common misconceptions

• “ETFs are only for traders.” Many investors hold ETFs for the long term.
• “An ETF and an index fund are the same.” The portfolio may be the same; how you buy, sell and pay for it differs. An index fund can be bought directly from the fund house, including through SIPs, without a demat account.
• “ETF units can always be sold at NAV.” On the exchange, you sell at whatever price buyers are willing to pay at that moment.

In India: Investing in ETFs on an exchange generally needs a demat and trading account. Tax treatment depends on what the ETF holds — equity, debt, gold or international assets — under current rules.