What are exchange-traded funds (ETFs) and how are they different from mutual funds?
- Gopal Krishna Murthy
Unlike mutual funds, ETFs trade on the stock exchange. Normally, ETFs are mounted on an index. So, we have the Nifty ETF, Sensex ETF or gold ETF. Hence, the investment is predefined, ratios are defined and then, you buy it.
One can buy an ETF through a stockbroker, whereas one can buy a mutual fund through a fund company, a mutual fund agent or some other intermediary. A mutual fund is bought at that day's NAV (net asset value). So, there's a fixed price. When one invests Rs 50,000 today, one isn't aware of what the price (NAV) will be in the evening. The NAV divided by the investment amount is the number of units that one receives.
When it comes to buying an ETF, one goes to a broker and places the order and the broker buys those ETF units for the investor. The price can vary from NAV because depending on the demand-supply and the brokerage, it could be more/less than the NAV. These units are accumulated in one's Demat account.
There could be multiple prices for ETFs, as there will be many buyers and sellers throughout the day who strike deals at different prices, which become purchase prices of ETF units. This is quite unlike the fixed price at the end of the day in the case of an open-ended index or a mutual fund.
This article was originally published on August 26, 2019.
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