What is ETF
Working of ETF:
In ETF, we have what is known as the ‘authorized participants’. They are usually appointed by the AMC or the Asset Management Company. As the first step, all the shares that comprise the index (or the gold in case of Gold ETF) are deposited with the AMC. Once this is done the authorized participants receive the ‘creation units’ from the AMC. These units are called ‘in-kind’ units as against the ‘in-cash’ units of Mutual funds, since these are obtained against the underlying shares/gold. These units are a large block and therefore have to be split into smaller units. These smaller units are then bought or sold in the stock exchange by the authorized participants.
Mutual Fund, ETF- a comparative study:
- Conventional Mutual Funds can be made of any portfolio. ETFs are usually index-specific.
- In the case of ETFs, the corpus does not change much as they are linked to the index.
- In ETF, the AMC need not keep large cash reserves as the buying and selling of units between the investors takes care of the redemptions.
- In ETF each investor pays for the additional cost unlike the mutual fund, where the cost is deducted from the NAV.
- In India, the concept is not quite popular, therefore the liquidity is low.
- An additional brokerage should be paid, if you want to re-invest your dividends.
- The ease of trade tends to increase the cost of the ETF.
- SIP is not a very convenient option in ETFs.
Since ETF is an emerging investment option, many more new types are entering the market. Some of those are the Currency ETF, Actively managed ETF, Leveraged ETF, etc. How many of these survive the market realities is yet to be seen.