Understanding exchange traded funds

Exchange Traded Fund or ETF mutual fund have emerged as a popular and innovative investment vehicle, providing investors with a diverse range of options to gain exposure to various asset classes. Investors looking to expand and diversify their financial portfolio by investing in passive mutual fund schemes can use this option for growth. This article aims to shed light on the fundamentals of ETF, their structure, advantages, and the evolving landscape of this dynamic investment tool.

Understanding ETFs:

An Exchange Traded Fund is a type of mutual fund investment, comprising a collection of securities such as stocks, bonds, or commodities. ETFs are designed to track the performance of a specific index or a basket of assets. Unlike active managed mutual funds, ETF schemes are traded on stock exchanges much like individual stocks, allowing investors to buy and sell the ETF units throughout the trading hours at market prices.

Structure of ETFs:

The structure of ETF plays a crucial role in their efficiency and cost-effectiveness. ETFs are typically structured as open-ended schemes. The open-end structure allows for the creation and redemption of units based on investors demand, ensuring the ETF’s market price closely aligns with its net asset value (NAV). Stockbrokers facilitate the transaction in ETF as it is mandatory for the investors to have a trading and a demat account.

One big difference between an ETF and active mutual funds is that active mutual fund schemes are transacted based on the mutual fund NAV declared at the end of the day while the transaction of ETF units takes place based on the rate available during the trading hours.

Advantages of ETFs: Here are some of the benefits of investing in an exchange traded fund-

Diversification – ETF provides investors with instant diversification by holding a broad range of assets within a single investment.

Liquidity – Being traded on stock exchanges, ETFs offer intraday liquidity, allowing investors to buy or sell units at market prices during trading hours just like any other shares. The trades are executed on the stock exchange platform and the payments are settled by the broker. 

Transparency – ETFs disclose their portfolio monthly, thus providing investors with transparency and insight into the fund’s underlying assets. The monthly fact sheet is published on the website of the asset management company.

Cost-Effective – ETF mutual funds typically have lower expense ratios (as they are passive funds) compared to traditional mutual fund investment, thus making them a cost-effective investment option.

Flexibility – ETF schemes cover a wide array of asset classes, including equities, fixed income, commodities, sectors and many more, therefore, provides the investors with flexibility to tailor their portfolios to specific investment goals basis risk profile and investment time horizon.

Evolving Landscape:

The landscape of ETF mutual funds continues to evolve with the introduction of thematic and niche ETFs, catering to specific investment themes, sectors, or strategies. As the ETF market expands, regulatory developments and advancements in technology may contribute to the introduction of new and innovative products, further diversifying investment options for market participants.


Exchange Traded Funds have become an integral part of modern investment portfolios, offering a convenient and cost-effective way for investors to access a broad range of asset classes. With their transparent structure, liquidity, and flexibility, ETF mutual fund investment continues to attract a diverse set of investors looking to build well-rounded and diversified portfolios in the ever-changing financial landscape.


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