The full form of ETF is Exchange Traded Fund. And Exchange Traded Fund means the fund which is traded in stock exchange. Before understand the ETF you have understand about the fund. If you have any doubt about ETF like ‘what is ETF?’ ‘how it works?’ then you can read this article. Here ETF is described in simple word.
What is fund?
Fund means the collected money which is raised from people. And the companies that manage the fund are called Asset Management Company or AMC. aMC appoint a fund manager to manage the fund. The fund manager invest the fund in different asset classes according to the goals and objectives of the fund. For this invested fund that much profit come to AMC or asset management company is shared into the people who imvested in this fund. Asset management company charge some fees to manage the fund raisind from people or investor. And the charges by AMC (asset management company) are called expense ratio. Now let’s discuss about ETF or Exchange Traded Fund.
What is ETF ?
Indian stock market idices like Nifty,Sensex etc are not traded in stock market because it is not a fund or stock. It is just a index that shows the market position or another seperate sector position depend on the indices. Nifty is the collection of 50 companies. So Nifty shows the performance of the 50 companies. The companies which are available in Nifty are well established and good performance company in different sector. For this from Nifty we can get a overall position of stock market. On the other hand ETF is a fund which follow the indices like Nifty,Sensex etc. Underdtand it with an example:
Nifty is the collection of 50 companies. And every company has different percentage in Nifty. Hdfc bank,Reliance industries and ITC are the most weightage stocks in Nifty. So on the basis of percentage Nifty ETF buy the stocks proportionally of 50 companies of Nifty. Here Nifty ETF follows fully Nifty index. It means the fund is invested proportionally in Nifty’s companies. Nifty ETF’s performance replicate Nifty’s performance. At all Nifty give return that much Nifty ETF return same. If Nifty index is up or down then Nifty ETF is also up or down. If you invested the fund like nifty,sensex and other indices ETF then you can gain profit as the indices return.
How ETF works?
ETF id traded in stock exchange like NSE,BSE like stocks. For the reason of supply and demand the return of index and ETF is not same always. It means nifty index does not match exactly with Nifty ETF. Let Nifty will return 18% in 2020 and the return of Nifty ETF will 17.95%. Then the difference of ii is called tracking error. It is good if tracking error is less. According to fund management techniques there is two types of funds. They are:
- Actively manage fund.
- Passively manage fund.
Fund manager research good quality stock and decide where to invest according to the goals and objectives of this fund in order to the investors get best returns. On the other hand in passively manage fund fund manager do not research quality stock. They just invest proportionally in ETF that replicate the index. For this the expense rario of passively manage fund is less than the actively manage fund and the expense ratio of it is less. Expense ratio means the annual fees of the fund that cover operating expenses like management fees,marketing expenses,compliance,adminstrative expenses etc.
Bharat ETF:
We watch often the ad of ETF in social network or TV. The expenses of this ad is covered by expense ratio. In august 2017 S&P BSE BHARAT 22 INDEX was launched. In this index 22 companies from different sector is imcluded. 19 companies are under Goverment and other 3 companies are private. All the 22 companies of this index are well established in different sector. 3 private companies ( L&T, AXIS BANK, ITC) has the weightage in Bharat 22 index of 39% and other 19 Goverment companies has the percentage of 61% in Bharat Index Fund. Bharat 22 ETF replicate S&P BSE BHARAT index.
To manage Bharat 22 ETF Goverment choose ICICI prudential asset management company. ETF is a tax free or relaxation product. If you hold index ETF less than 1 year then you have to pay tax and if you hold index ETF more than 1 year then you do not have to pay tax. To invest in ETF demat account is compulsory. Open online free brokerage firm’s demat account (Zerodha, Upstox).
Best wishes to invest.
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