ETFs (Exchange-Traded Funds): What Are ETFs And How Do They Work?

Investments in the market are taken with the aim of earning extra revenue. People want the said extra revenue because they believe that the money will help them to take care of their day-to-day expenditures after retiring. But, before starting with your investment journey, it is imperative to remember that the act of investing is considered a long-time commitment and moreover, this action will help you with acquiring long-term wealth. When it comes to fund allocation, the income earned from the investment plans is as good as you build. For getting the portfolio right, you must get the allocation of assets i.e., equity, debt, and commodity, aligned with your investment objectives.

To build the portfolio in the right way, it is imperative that you are required to spend sufficient time studying the market and scrutinising all asset classes. After that, you should determine the level of fund allocation. It is common knowledge that several factors are known for having an impact on market sentiments, resulting in sharp variation in performance. Trying to keep up with all these factors, may not be easy for new investors. That’s where exchange-traded funds, i.e., ETFs can be helpful.

What are exchange-traded funds (ETFs)?

An example of a scheme that follows the passive investment strategy, exchange-traded funds (ETFs) is known for being shared investment tools that are known for functioning by both tracking and replicating an index. The index then can allocate funds to various asset classes like gold, debt, and equity.

Generally, these funds are known for tracking things like a sector, or a particular index.  However, the one way they are different from mutual funds is that exchange-traded funds can be either purchased or sold on an exchange just like stocks.

How do ETFs work?

ETFs are variants of mutual funds that are listed and traded on the stock exchange. This scheme can be both bought and sold with the help of an exchange just you do it with stocks. While most ETFs are generally known for being passively managed, there are some of these schemes that are actively managed as well. A portfolio for passive ETF is built in such a way that it can track an index such as the NIFTY 50. The NIFTY 50 can be defined as the index which is known for allocating funds to 50 of the largest Indian companies that are listed on the National Stock Exchange (NSE).

Moreover, ETFs may even track an index that is known for representing a sector (like NIFTY Pharma), or a commodity like gold. It is also important not that ETFs are also known for having symbols, like how it is possible to identify a company’s share by a specific symbol. For instance, on the exchange, it is possible to identify the IT company Infosys through the symbol INFY. Therefore, while looking up the share price of Infosys, all you need to do is look for ‘INFY’. Similarly, ETFs come with a specific ticker symbol as an identifier. With the help of this symbol, you can determine the ETF and find its current price. It is also important to note that there are different variants of ETFs that are available in the market as investment options. The said variants of exchange-traded funds are:

  • Equity ETFs:

This type of ETF is known for tracking broad market stock indices such as the BSE SENSEX or NIFTY 50. Apart from that, there are some international ETFs that follow the popular index of global markets such as Hang Seng and NASDAQ 100. If you are fresh in the world of investing, equity ETFs will help you to take the first step in equity investing. They do so by providing you with a flavour of what investing in stock markets feels like. By signing up for such an ETF, you will also get a chance to own all stocks that are part of a popular index and help their portfolio post near index-matching returns.

  • Debt ETFs:

Debt ETFs expose your investments to debt securities such as corporate bonds, government securities, commercial papers, and many more. They are known for tracking a debt index which, at times is specifically designed for the ETFs.

ETFs are known for being low-cost investment options. An ETF can also be used for exposing your funds to any market, asset class, or commodity.