June 07 , 2012
A fund (such as a mutual fund) is a vehicle to collect investor money and manage it professionally by investing in a set of stocks, bonds, gold, etc. When such a fund itself is listed in the stock market - it trades like any other share – it is called an Exchange Traded Fund (ETF).
In India, ETFs typically are used to refer to passive funds that only track an index – i.e. actively managed funds are not called ETFs even if they are traded in the market. Passive ETFs can track any index - the Sensex, Nifty, a bond index, a sector index or even a gold index.
The benefit of an ETF is that, for a very small fee, they offer the returns of a particular index or asset class. Over the long term, this can have significant upside over keeping money idle in bank accounts or keeping it in fixed deposits. ETF charges are far lower than those of actively managed funds or investment-cum-insurance products, and this too has a significant impact over the long term.