ETF (Exchange Traded Fund) is a type of investment fund that trades on a stock exchange, like a stock. ETF is a collection of securities, such as stocks or bonds, that track an underlying index or asset.
ETFs offer you a low-cost and convenient way to invest in a diversified portfolio of assets. You can buy and sell the ETFs at any time during the trading period, there is no lock-in period.
ETFs are managed by fund managers and charge a management fee of up to 1%. Generally, ETFs have lower fees than actively managed mutual funds.
How ETFs Works
ETFs work by tracking the market price of an underlying index or asset. The fund manager buys a diversified range of investments to create a portfolio that represents the underlying index or sector.
Then the ETF issues shares to the investors, which can buy or sell on a stock exchange throughout the trading day.
ETF charges a lower expense ratio to manage the fund, including buying and selling the underlying securities, rebalancing the portfolio, and tracking the performance of the underlying index. Expense ratio is a percentage of your investment in the fund.
ETFs are generally passively managed, which means ETFs are designed to track the performance of a particular index rather than trying to beat the market by actively selecting individual securities.
This makes them a cost-effective investment option, as they have lower management fees than actively managed funds. ETFs provide you with exposure to a diversified range of assets through a single investment that tracks the broader market or specific sectors.
Types of ETF
Here are the most common types of ETFs in India include:
#1. Equity ETFs
Equity ETFs invest in a basket of stocks that track a particular index, such as the Nifty 50, Nifty 100, or the BSE Sensex. Equity ETFs are suitable for you who are looking for exposure to the stock market with lower fees than actively managed mutual funds.
#2. Debt ETFs
Debt ETFs invest in fixed income securities, such as bonds or government securities. Debt ETFs are the best choice for a steady income stream and lower volatility than equity ETFs.
#3. Commodity ETFs
Commodity ETF includes gold ETFs. Gold ETFs invest in physical gold and track the price of gold. Gold ETFs are popular among investors looking to diversify their portfolio with a safe-haven asset like gold.
#4. International ETFs
These ETFs invest in foreign stocks or indices and provide Indian investors with exposure to international markets. International ETFs are suitable for you who are looking to diversify your portfolio with investments in other countries.
How to Buy ETF in Zerodha
Step #1. Login into your Zerodha demat account on kite. Make sure you have a demat or trading account with Zerodha.
Step #2. You can search the ETF in the search box that you want to invest in. Add them to your watchlist.
Step #3. Click on the ETF which you want to invest in.
Step #4. Then click on the “Buy” button.
Step #5. Enter the quantity of the ETF, set the price and choose order type including market price, limit order, or stop loss.
Step #6. Swipe on the ‘Buy’ button to place your order.
Step #7. Now you can check if your order is executed or not, under the “order” option.
Step #8. You will receive the ETF units in your holding section.
ETF are settleted to your demat account on T+2 basis. This means that ETF trades are settled on the second business day after the trade date.
For example, if you buy or sell an ETF on Monday, then the ETF will be settled on Wednesday.
You may also like to read how to invest in Gold ETF on Zerodha.
Zerodha ETF Brokerage Charges
Zerodha’s ETF charges are similar to equity delivery charges but the STT is not applicable as ETFs are not considered securities. Zerodha offers zero brokerage charges for both ETF and equity delivery.
Additionally, there are no entry or exit loads as ETFs are traded on the secondary market.
Charges for Zerodha ETFs are as follows:
- Brokerage charges: Zero
- Transaction charges: 0.00345% for NSE and 0.00375% for BSE on turnover (Quantity * Price).
- GST on the transaction charge: 18%
- SEBI Charge: Rs. 10 per crore + 18% GST.
- Stamp Duty: Depends upon the state of correspondence address.
- DP charge at Zerodha: Rs. 13.5 + GST for exiting ETF
Quick Comparison Between ETFs, Stocks, & Mutual Funds
| Category | ETFs | Stocks | Mutual Funds |
| Type of investment | Fund | Equity | Fund |
| Definition | A basket of securities that tracks an underlying index or sector and is traded on an exchange like a stock | Single security that shares of ownership in a company | A type of investment fund that pools money from multiple investors to invest in a diversified portfolio of securities |
| Diversification | Provides diversification by holding a basket of securities | Limited diversification as it represents ownership in a single company | Provides diversification by investing in a diversified portfolio of securities |
| Trading flexibility | Can be bought and sold throughout the trading day | Can be bought and sold throughout the trading day | Traded at the end of the trading day based on the net asset value (NAV) |
| Management style | Generally passively managed to track an index or sector. | Active (selecting specific stocks to buy and sell) | Passive (tracking a particular index or market sector) or active |
| Fees | Generally lower fees than actively managed mutual funds, and similar fees to index mutual funds | Brokerage fees, and may have additional fees for buying and selling | Can have higher fees than ETFs due to active management and higher operating expenses |
| Liquidity | High | High | Lower than ETFs & stocks |
| Risk | Moderate risk due to diversification, but still subject to market fluctuations. | Higher risk due to exposure to a single company. | Moderate to high risk depending on the investment strategy and portfolio. |
FAQs
ETF dividends are generally paid out to you in cash or reinvested back into the ETF through a dividend reinvestment plan (DRIP). You can choose to receive the dividend payout in cash or reinvest it in additional shares of the ETF.
Yes, ETFs can pay dividends, depending on the underlying securities in the fund’s portfolio. The amount and frequency of dividends can vary depending on the ETF’s investment strategy and the securities it holds.
ETF (exchange-traded fund) is an investment fund that holds a basket of securities and is designed to track the performance of a particular index, sector, or asset class. ETFs are traded on stock exchanges like individual stocks.
Securities Transaction Tax (STT) is not applicable to ETFs including Gold ETFs, liquid, Gilt ETFs, and international ETFs.
ETFs and Index Funds are both passive investment funds that aim to track the performance of a particular benchmark or index.
However, there are some differences between ETF and Index funds.
- ETFs trade like a stock on an exchange and can be bought and sold throughout the trading day, while index funds are mutual funds that are priced once a day after the market closes.
- ETFs can be bought or sold at the current market price, while index funds are bought or sold at the net asset value (NAV).
- ETFs generally have lower fees than index funds due to their passive management style and lower operating costs.
Expense Ratio is a measure of the fees charged by an investment fund, such as a mutual fund or ETF, for managing and operating the fund.
The expense ratio is measured as a percentage of the fund’s assets and includes various costs, such as management fees, administrative expenses, and other operating costs.
Tracking error is a measure of how closely an exchange-traded fund (ETF) follows the performance of its underlying index or benchmark. Tracking error is calculated as the difference between the returns of the ETF NAV and tracks the performance of its underlying benchmark or index.
For example, if Nifty 50 returned 10% and Nifty ETF gave 9.8%, the tracking error would be 0.2%.
