EXCHANGE TRADED FUND (ETF)
What is ETF?
Exchange traded Fund is a basket of stocks which have a common character. They could be all index stocks or PSU stocks or Energy shares or IT shares etc.
It is not possible for the investor to buy all 50 stocks in NIFTY index, but if someone were to collect money from several investors and buy all the shares in same proportion as index or an altered ratio then an investor needs to buy just one unit of the fund and get a flavour of all the index stocks.
ETF is a popular for government disinvestment. Government has floated an open-ended fund i.e. It can go on accepting money from the investors in the fund. The Navratna stocks are sold to the fund by the government, this helps in keeping the PSU price stable and government selling happens without a crash in the price of PSU.
Generally, the stocks underlying the ETF determine the risk of the fund. Risk is reduced due to presence of large number of stocks in the basket. However, if the underlying stocks are small cap or mid cap there is higher amount of risk. Market fluctuations and volatility in markets create risk to the fund.
These funds are tradeable on the exchange. However, except for a few popular ones there is poor liquidity in the ETF. Exit is only when the fund is closed. Some fund managers do market making by providing liquidity to the Fund
The Dividend earned is regularly distributed to ETF holders. Performance of underlying assets determines the performance of the fund. For eg. an index fund will give good returns if the Nifty / Sensex stocks perform well
The Dividend is now taxed in the hand of investor and there are capital gains on sale / redemption of the EFT Units
How to invest?
If you do not have a KYC account with us open one or already have account, you can buy ETF in open market.
Just for information
Government disinvestment is done through ETF. These issues are good investment opportunities since government has been providing discounts on ETF issues