I want to understand the proper functioning of an ETF. After the NFO, an ETF is traded on the Stock Exchange. So how does an AMC benefit by it? Also, how is the NAV declared?
-Ashish Ahuja
An ETF is like an index fund in terms of its portfolio. The basket of stocks is in the same proportion as the pre-decided index. The initial participants give the fund the basket of stocks and in turn take units of the fund in exchange. These units are then traded on the stock exchange through stock brokers. So investors who wish to take up units of an ETF require a demat account.
The price of an ETF fluctuates with the fluctuation in the underlying index throughout the trading day. The NAV is usually a fraction of the value of the index, like one-tenth or one-hundredth. But the value at which it is traded is a function of its demand and supply. So ETF units can trade at premium or at discount.
The benefit of an ETF to an AMC is more or less the same as it would be in case of any other mutual fund. But since it tracks an index, it doesn’t require active management of the underlying portfolio.
This article was originally published on February 11, 2009.
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