What are exchange traded funds and how are they different from mutual funds?
-Pranav
Exchange traded funds are mutual funds, except the way you buy and sell them. When you buy a mutual fund, you go to the agent and buy a fund based on the end of the day's NAV. When you're investing in mutual funds, you don't know what will be the price of the fund. Based on that day's NAV, you will be allotted as many units. Compared to that, ETF is generally mounted on an index and you buy it exactly like a share. You go to a stock broker, you place an order and you buy it. Generally, ETFs are very low cost but you have different kinds of transaction costs in terms of brokerage. In case of mutual funds, you don't incur these expenses. ETFs are passive funds which are invested in index constituents in the same proportion as that of the index, there is no fund manager responsible for managing them. You know beforehand where the money exactly will be and that is unlikely to change. You get returns in exact proportion to that index, except for the expense.
This article was originally published on April 04, 2014.
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