What is ETF and how it works?

WHAT IS ETF( Exchange Trade Fund) 

It can be simply terms as fund which trades on stock exchange. 

Before understanding what is ETF you must understand that what is fund. 

Fund simply means the money which are collected from people. The company which managed the fund is known as Asset Management companies and for funds asset management companies appoint a fund manager. 

Fund manager invest that fund according to the objective & goals of that funds. The profit gain from that fund is shared between the people's who had invested in that funds. 

To manage that fund companies charge some amount which is termed as fees or expense ratio. 

Let's talk about Exchange traded funds. 

 

Nifty, sensex, Nifty Bank, other indices you can't buy them because these are not funds these are just index which give is details about a specific sector. 

In Nifty there are 50 companies listed so it give us detailed information about those  well shifted companies. 

Where EFT is a fund which can replicate

Let's understand this with an example 

As we have seen total 50 companies are there in Nifty. And each stock has its particular weighted in 2017 HDFC Bank has 9.27% , Reliance Industry has 7.84% , ITC have 5.69% and 77.23% in other countries. 

That meat nifty and nifty ETF should make same amount of money if nifty will go up then nifty ETF will also go up. 

ETF are trade similarly like share in stock exchange because of supply and demand ETF return will not match similar to the return with index funds it's slightly up or down. 

Example :- If nifty is 25 % 2017 and nifty ETF is only is 24.90% and the difference in them is Nifty ETF. The error is termed as Tracking error. 

According to fund manager there are two types of funds. 

1) Actively managed funds. 

2) passively managed funds. 

ETF is a passively managed funds. So it's funds ratio is less then actively managed funds. 

Some example of ETF Funds are 

1) ICICI Prudential Nifty ETF. 

2)Birla sun lite Nifty ETF. 

3)Bharat 22 ETF. 

4) kolkata Nifty ETF. 

Etc..... 

To invest in ETF it is attention to have a Demate account. 

If you have any questions related to ETF or Share market you can ask in comment section.