Bharat Bond ETF made its debut on the stock market on Thursday. This ETF will invest only in AAA-rated bonds of public sector companies for three years and 10 years maturity date. But before understanding that, what is an ETF and how does it function? Let’s try to understand that.
Trading the Exchange Traded Fund (ETF)
An ETF is a collection of securities like stocks, commodities or bonds, or a mixture that trades on an exchange and the funds units (or shares) are bought and sold throughout the day just like stocks. ETF’s share price also keeps fluctuating throughout the day during market hours as and how they are traded.
Similarities
As explained above, ETFs trade like stocks and are very liquid in nature as one can buy and sell the shares throughout market hours.
ETFs in some way are also similar to mutual funds (MFs) as the fund consists of various assets that diversify the investors’ portfolio, just like mutual funds.
Benefits
ETFs give access to different stocks across various sectors and industries, in a lower average cost as the investor does not have to individually buy different stocks held in one portfolio.
Bond ETFs have fixed maturity date with no lock-in period as they can be sold anytime on the stock exchange. One can also earn stable and tax efficient returns over the maturity period.
Even with some similarities like mutual funds, ETFs are not priced at the close of the trading day.
Some flaws
Everything comes with some pros and cons. Even if ETFs are considered less risky, they come with some underlying fluctuations and risks. ETFs can be impacted by the volatility in the stock market. Also, costs like brokerage commissions, sales charges and so on can entail high cost.
Now that you know what and how of ETFs, you can make better and informed investment decisions based on the popularity, pros, and drawbacks.
