What Are Exchange Traded Funds (ETF)? ETF Drawbacks For Investors

If you are also an investor then you must be aware about the problems before choosing the right investment type that offer liquidity and cost effectiveness. Going with the traditional way like mutual funds can be expensive and less flexible for investors.

If you also face the similar problem then you should Exchange Traded Funds (ETFs) cause they offer the best solution for problem like these. ETFs are investment funds traded on stock exchanges, much like individual stocks.

Investors can buy and sell ETFs throughout the trading day at market prices, often with lower expense ratios. In this blog, we will see what are Exchange Traded Funds (EFT)? How Does Exchange Traded Funds (ETF) Works? What are the ETF drawbacks and problems investors face?

What Are ExchangeTraded Funds (ETF)?

First of all, let’s understand what are Exchange Traded Funds ETFs. Now as in Index Funds, whenever any mutual fund invests money in any Index. Index means like nifty is an Index. Sensex is an Index. Nifty Next 50 is an Index. Like this, there are Sectoral Indices as well, like there is an Index for the IT sector. If any fund invests in an index like this. So for that, what options do we have?

One is Index Fund, Second option is of Exchange Traded Fund. So this Exchange Traded Fund which we call ETF in short, it collects funds from investors, like in a mutual fund, funds are collected. After that whatever Index it’s following.

For example if it’s following Nifty, So the top 50 Indian companies and whatever proportion they share in Nifty, In that proportion, it will buy the stocks. So following an Index, it works just like an Index fund. Then how is it different?

See, first of all, full form of ETF is Exchange Traded Fund, that means it is being traded somewhere, it is being traded at the exchange. That means NSE or BSE which is our stock exchange, ETF are traded there. it means, it is also performing like stocks. that means for this we want a Demat account. We don’t need a Demat account to invest in an Index fund or Mutual fund.

How Do Exchange Traded Funds (ETF) Works?

How does Exchange Traded Funds (ETF) Works? but before that let’s minutely understand the working of ETF. So see, in an Index fund and Mutual funds, money is collected from investors and the fund gets the money. After that, it invests it.

So if new investors want to join in it’s Asset Under Management could keep on increasing. That means if an Index fund or Mutual fund of a thousand crore is launched today, that could of two thousand crores as well tomorrow, it could be of ten thousand crore day after tomorrow as well. But Exchange Traded Fund works differently.

Exchange-Traded Fund works like the stock of a company. Let’s understand it with a comparison of a business. See whenever any business wants money if it raises money from the market it brings an IPO, and suppose it raised a thousand crore from IPO so that a thousand crores come to them only once. Similarly, as the business operates, ETF operates in the same way Whenever a New fund come which we call NFO in short, it is also like an IPO in a lot of ways.

So suppose there are a thousand investors under 500 crore and hypothetically let’s suppose everyone invested equally. So total shares of ETF will be divided among those 1000 investors. And these ETF share or unit, these are traded in the stock exchange just like stocks are traded. similarly 1 unit of ETF trades. We buy or sell just that.

Conclusion

In summary, Exchange Traded Funds (ETFs) is a compelling investment option that overcomes the core problems investors dislike about funds. Their flexible stock trading and low costs means ETF can give investors the best of both worlds between mutual fund and individual stock investing.

By understanding how ETFs work and their advantages and disadvantages, investors can make more informed decisions so that their whole investment plan is put on the right track and they reach all financial goals. Whether you re an experienced investor or a newbie to this exciting world of stocks, ETFs could provide a valuable addition to your portfolio. They offer balanced growth and management of risk conducive for all levels in the market of trade.