Exchange Traded Funds are funds that are managed passively & give returns equivalent to underlying index at low costs. The term ‘passively managed’ means it does not need an active involvement of fund managers.
There are various types of traded funds such as index fund, bank fund, money market etc. Based on the risk profile the investor can invest in an ETF.
How does ETF’s work?
Exchange Traded Funds invest in gold, company stock, bonds etc based on the underlying index of tracking. Effectively, ETF divides total assets into a number of parts and sells it as a unit.
ETFs are traded on the stock exchanges like a stock of companies. This means the price of an ETF changes throughout the day whenever an ETF is bought or sold.
Pros & Cons of ETFs
Types of Exchange Traded Funds
The main question arises who should invest in Exchange Traded Funds?
ETFs are for new investors. If you are new to the stock market and have no knowledge, you can invest in ETFs. Make sure to choose the right broker with lower fees when you buy these funds.
| Pros |
Cons |
| Cost efficient, compared to other mutual funds. | Can not be sold directly. Need to pay a trading commission to a brokerage house every time you buy or sell trading funds. |
| Offers anytime liquidity via exchanges | Many times an ETF suffers from trading error. You also can’t get the performance of the index this fund follows. |
| Offers Intraday trading facility. You can earn money by doing Intraday trading. | Trading Volumes are low in few ETfs. Need to be careful when dealing with such trading funds. |
- Index Fund
- Gold Fund
- Bank Fund
- International ETF
| ETF |
Mutual Funds |
| Passive Management | Active Management |
| Lower Cost of Investing | Higher Cost of Investing |
| Tradability – More Liquid | Tradability – Less Liquid |
