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ETF is a type of investment that aims to provide returns similar to the underlying index. (iStock)
ETF is a type of investment that aims to provide returns similar to the underlying index. (iStock)

Exchange Traded Funds: All you need to know

An ETF has to invest at least 95% of its total assets in securities of the index that it is tracking.

Exchange Traded Funds or ETFs have witnessed major inflows in the last one year. The assets under Gold ETFs have soared by 155% in the last one year to 12,941 crore as on July 31. Other ETF AUM has also risen by 37% in the same period. An ETF is a passive form of investing which invests in a basket of securities that mostly tracks a certain index. It tries to mirror the return of the index it is tracking. Unlike mutual funds, ETFs can be bought and sold only through the stock exchanges. Demat account is a must to trade in ETFs. Since they are passively manged, ETFs are cheaper and have a much lower expense ratio compared to actively-managed mutual funds.

Here is all you need to know about ETFs:

  • An ETF has to invest minimum 95% of its total assets in securities of the index that it is tracking.
  • ETFs are listed and trade like stocks on the stock exchange and hence can be bought and sold at intra-day market levels.
  • ETFs track the performance of the Total Return Index (TRI) and hence gives investor both the price and and dividend returns. In a TRI, the dividends of the underlying companies of the index are added back into their share prices.
  • An ETF is taxed like mutual funds depending on its asset category. For example, a NIFTY 50 ETF will be taxed like an equity mutual fund, a 10-year G-Sec ETF will be taxed as a debt mutual fund.
  • An ETF is a low cost instrument. Its expense ratio varies from 0.01% to around 1%. However, every time an investor makes a purchase or sale onan exchange she pays a brokerage for the transaction. In addition, an investor may also incur STT and the usual costs of trading in stocks.

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