Glossary
What is ETF (Exchange-Traded Fund)? Meaning, Example & Why It Matters
A fund that holds a basket of assets, such as an index's stocks or gold, and trades on the exchange like a share.
An exchange-traded fund, or ETF, is a fund that pools money to hold a basket of assets, such as the stocks in an index, government bonds or gold. Unlike regular mutual funds, ETF units are listed on stock exchanges, so you buy and sell them through your trading and demat accounts at market prices during the day.
Why ETF matters to you
ETFs are popular for low-cost, diversified investing. Many track an index, so you get exposure to many companies in a single purchase. Costs include the fund's expense ratio, which is deducted from the fund's value, plus the usual trading costs like brokerage, STT where applicable, DP charges on selling and exchange charges.
One thing to watch is liquidity. Some ETFs trade in small volumes, which can lead to wide bid-ask spreads and prices that differ from the fund's actual net asset value (NAV). Buying or selling at a poor price can cost more than the expense ratio saves.
Practical tip: before buying an ETF, check its trading volume, bid-ask spread and how closely its price tracks its indicative NAV. Use limit orders rather than market orders, especially for less liquid ETFs.
Example: Illustrative only: if an index ETF trades at ₹200 per unit, buying 50 units costs about ₹10,000 plus charges, giving you exposure to all the stocks in that index in one transaction.
See it in rupees: every charge and tax on a real trade, at every broker. Open the brokerage calculator
Related terms
- GlossaryDelivery Trading
Buying shares and holding them in your demat account beyond the trading day, for days, months or years.
- GlossaryDemat Account
An electronic account that holds your shares, ETFs, bonds and other securities in dematerialised form.
- GlossaryLimit Order
An order to buy or sell only at a specified price or better, giving you control over the execution price.
- GlossaryDP Charges
Fees charged by the depository and your depository participant when securities are debited from your demat account.
Frequently asked questions
How is an ETF different from a mutual fund?
ETFs trade on the exchange at market prices throughout the day, while regular mutual fund units are bought from the fund house at end-of-day NAV.
Do I need a demat account to buy ETFs?
Yes, ETF units are held in your demat account, so you need trading and demat accounts.
Are ETFs risk-free?
No. ETFs carry the risk of the assets they hold, plus liquidity and tracking risks.