Although most investors know mutual funds are equity, debt, hybrid, etc. they are also largely categorized based on their investment style. Mutual funds can also be categorized as active funds and passive funds. Active funds are those mutual funds that are actively managed by the fund manager who along with a team of market researchers and analysts constantly tries to maintain a well-diversified portfolio whilst taking advantage of the existing market conditions. On the other hand, passive funds are those mutual funds that follow a passive investment strategy. Passive funds too have a fund manager but these funds are designed in a way that they try to generate returns by tracking the performance of their underlying index with minimum tracking error.
Mutual fund schemes like index funds and exchange traded funds (ETFs) follow a passive investment strategy.
What is an Exchange Traded Fund?
An exchange-traded fund is a passive mutual fund scheme whose units are available for trading at their current live market price just like any other company stock. While active funds try to outperform their benchmark, ETFs are designed in such a way that they try to drive in the alpha by replicating the performance of their benchmark instead of outperforming it. ETFs, invest in their underlying index in the same way as the securities are listed in the benchmark without changing the portfolio composition. Depending on the nature of the scheme and its investment objective, an ETF can track a sector, an index, a commodity, a currency, an international market, or even fixed-income securities.
How to trade with ETF units?
ETFs are highly liquid in nature especially if you compare them to active mutual funds. To sell your active fund units, you have to place an order request to the AMC, and you can sell these units based on the NAV of the mutual fund scheme which is determined at the end of the day. However, when it comes to ETFs since these are listed on every stock index, one can enter or exit their ETF investments end number of times during live trading hours. This gives investors to favor the fluctuating ETF unit price and they can indulge in intraday trading which is not possible with any other actively managed fund or passively managed fund (like index fund).
To trade in ETFs investors, need to have the following –
- A trading account
- A Demat account
A trading account is required so that investors can buy or sell their ETF units and a demat account is required for investors to park their bought ETF units.
There are multiple ways in which you can trade in ETF units –
- The traditional way to invest in ETFs is by placing an order request to your broker over a telephonic conversation. You need to be specific about how much you want to buy or sell your ETF units and ensure that you have enough balance in your trading balance account.
- The next way to trade in ETF units is by going to the website of the broker whose ETF units you want to buy or sell and by doing it from their designated online portal.
- The third and final way to buy or sell ETF units is by using the mobile app that AMC has made available for investors.
Do remember that there isn’t a separate way to invest in ETFs. One can trade in ETFs just in the same way they trade with company stocks.
