The concept of an Exchange Traded Fund (ETF) is that you buy a mutual fund like a stock on an exchange. This is suitable for investors who want to invest in a basket of instruments or an otherwise difficult-to-invest market.
For example, investors in India may want to invest directly in US stocks. But the legal procedures for direct investment are painful — instead, they could buy an ETF that, in turn, is based on a US stock index.
When you buy a unit of, say, NiftyBeES (an ETF by Benchmark Mutual Fund), you get a share worth 1/10th of the Nifty price; so for Rs. 580 you could buy a piece of an index that, without the ETF, could take you more than 40 lakhs to fully construct.
While most index funds lock you in for a year or so (with a 1% exit load) ETFs can be sold any time without such a penalty. But it could just be that you can't sell very easily if the ETF is not well traded — getting a price lower than the fund's NAV is, in a way, an exit load.
There are now more than 2000 ETFs inRead More »from ETFs and Skewed Indexes