Key Takeaway

Exchange-Traded Funds (ETFs): Listed on stock exchanges and can be bought and sold during market hours like shares.

REITs: Real Estate Investment Trusts that can be traded on stock exchanges and provide exposure to real estate assets.

InvITs: Infrastructure Investment Trusts that are listed and traded on stock exchanges, offering exposure to infrastructure assets.

Traditional Mutual Funds: Generally bought and redeemed through the mutual fund structure rather than traded directly like stocks.

Index Funds: Track a market index and are generally purchased or redeemed through the mutual fund structure rather than traded like shares.

A Small Story: One Investment, Many Companies

Imagine Rahul, a young investor who has ₹50,000 to invest.

He wants to invest in the Indian stock market but does not know which individual companies to select. He thinks about buying shares of several large companies, but then realizes that selecting and monitoring every stock can be difficult.

A friend tells him about an ETF that tracks the Nifty 50.

Instead of purchasing dozens of individual stocks, Rahul can buy units of the ETF and obtain exposure to a basket of companies through one investment.

Rahul then asks an important question:

“If this is a fund, can I buy and sell it like a share?”

The answer is yes, if it is an ETF.

This simple example helps us understand the difference between funds that are traded on stock exchanges and funds that are purchased through the traditional mutual fund structure.

What Type of Funds Are Traded in the Stock Market?

The answer is primarily Exchange-Traded Funds (ETFs).

An ETF is a pooled investment product that holds a portfolio of securities or provides exposure to an underlying asset. Unlike a conventional mutual fund, an ETF is listed on a stock exchange and can be bought or sold during market hours.

There are different types of ETFs, including equity ETFs, index ETFs, sector ETFs, gold ETFs, debt ETFs and international ETFs.

In addition, investors can trade REITs and InvITs on stock exchanges, but these are not technically mutual funds.

To understand this properly, let's look at the major categories.

What Is an Exchange-Traded Fund?

An Exchange-Traded Fund, or ETF, is a fund whose units are listed on a stock exchange.

An ETF generally holds a basket of securities or tracks an index, commodity or other underlying asset.

For example, a Nifty 50 ETF aims to provide returns that closely follow the Nifty 50 Index.

Instead of buying each company in the index separately, an investor can buy units of the ETF.

The major feature of an ETF is that its units can be traded on the stock exchange throughout market hours, just like shares.

What Types of ETFs Can Be Traded?

There are several types of ETFs available to investors.

Equity ETFs

Equity ETFs provide exposure to a basket of stocks.

Examples include ETFs tracking broad market indices such as the Nifty 50 or Sensex.

Sector ETFs

Sector ETFs focus on a particular sector such as banking, information technology, healthcare or energy.

Gold ETFs

Gold ETFs provide exposure to gold through an exchange-traded structure without requiring investors to store physical gold.

Debt ETFs

Debt ETFs invest in or track fixed-income securities such as government securities or bonds, depending on the fund's objective.

International ETFs

International ETFs provide exposure to overseas markets or securities, subject to the applicable regulatory framework.

Therefore, investors can choose ETFs based on their investment objectives and risk preferences.

Are Mutual Funds Traded on the Stock Market?

Traditional mutual funds are generally not traded on stock exchanges like shares.

When an investor purchases a conventional mutual fund, the transaction takes place through the mutual fund structure and units are generally allotted or redeemed at the applicable Net Asset Value (NAV).

This is different from an ETF.

For example, if you purchase an ETF during market hours, its price changes according to demand and supply on the exchange.

A conventional mutual fund, however, is generally transacted at the applicable NAV rather than at a continuously changing exchange price.

Therefore:

ETF = traded on stock exchange

Traditional mutual fund = generally bought/redeemed through fund house or platform

Are Index Funds Traded on the Stock Market?

An index fund is designed to track a particular market index.

For example, a Nifty 50 index fund attempts to replicate the performance of the Nifty 50.

However, a conventional index mutual fund is generally not traded on the stock exchange like an ETF.

This creates an important distinction.

An ETF can track the Nifty 50 and trade on the stock exchange.

A traditional index mutual fund can also track the Nifty 50 but is generally bought and redeemed through the mutual fund structure.

Therefore, the underlying investment strategy may be similar, but the investment structure is different.

Can REITs Be Traded in the Stock Market?

Yes.

A Real Estate Investment Trust (REIT) is an investment structure that provides investors with exposure to income-generating real estate assets.

REIT units can be listed and traded on stock exchanges.

For example, instead of directly purchasing a large commercial property, an investor can invest in a listed REIT and gain exposure to a portfolio of real-estate assets.

However, it is important to remember that:

REITs are not conventional mutual funds.

They are separate investment vehicles with their own structure, regulations and risks.

Can InvITs Be Traded in the Stock Market?

Yes.

InvIT stands for Infrastructure Investment Trust.

InvITs allow investors to obtain exposure to infrastructure assets through a trust structure.

The underlying assets can include infrastructure such as roads, power transmission assets and renewable-energy infrastructure, depending on the InvIT.

Listed InvIT units can be bought and sold on stock exchanges.

Like REITs, InvITs should not be classified as traditional mutual funds, even though they provide pooled investment exposure.

What Is the Difference Between an ETF and a Stock?

An ETF may trade like a stock, but it is fundamentally different from an individual company's share.

When an investor buys a company's share, the investor obtains ownership exposure to that particular company.

When an investor buys an ETF unit, the investor obtains exposure to the portfolio or underlying assets represented by the ETF.

For example, buying one company's stock exposes the investor to that company.

Buying a Nifty 50 ETF provides exposure to a basket of companies represented by the index.

Therefore, ETFs can provide diversification through a single exchange transaction.

Why Do Investors Choose ETFs?

Investors choose ETFs for several reasons.

First, ETFs can provide diversification, because one ETF may hold many securities.

Second, ETFs offer exchange trading, allowing investors to buy and sell units during market hours.

Third, many passive ETFs have relatively low expenses compared with actively managed investment products.

Fourth, ETFs can provide exposure to specific markets, sectors, commodities or investment strategies without requiring investors to purchase every underlying asset individually.

However, ETFs are not risk-free.

Their risk depends on the assets they track, and investors should also consider liquidity, expense ratio, tracking difference and the bid-ask spread before investing.

What Should You Check Before Buying an ETF?

Before investing in an ETF, an investor should understand what the ETF actually tracks.

The investor should check the underlying index or asset, expense ratio, tracking difference, liquidity, trading volume, bid-ask spread, assets under management and risk profile.

An ETF with a very low price is not automatically cheaper or better than an ETF with a higher unit price.Similarly, past returns do not guarantee future performance.

The underlying asset and the ETF's ability to track it efficiently are more important factors to evaluate.

Final Thought

The stock market is not limited to individual company shares.

Investors can access different asset classes and investment strategies through exchange-traded products. Among these, ETFs are the most direct example of a fund that trades on a stock exchange. A traditional mutual fund and an ETF may invest in similar assets, but their structures are different. The ETF trades throughout market hours, while a conventional mutual fund is generally bought or redeemed at the applicable NAV. REITs and InvITs provide additional exchange-traded opportunities for investors who want exposure to real estate and infrastructure. Therefore, before investing, the most important question is not simply “What fund should I buy?” Instead, ask: “What asset am I investing in, how does the product work, what are the costs and risks, and is it suitable for my financial objective?” Understanding the structure is the first step toward making an informed investment decision.

Frequently Asked Questions (FAQ)

1. What type of fund is traded on the stock market?

An Exchange-Traded Fund (ETF) is a fund that is listed on a stock exchange and can be bought and sold during market hours like a share.

2. Can mutual funds be traded on the stock exchange?

Traditional mutual funds are generally purchased and redeemed through the mutual fund structure rather than traded continuously on the stock exchange, while ETFs are specifically designed for exchange trading.

3. What is an ETF?

An ETF is a pooled investment fund that holds or tracks a basket of assets such as stocks, bonds, commodities or an index and whose units are traded on a stock exchange.

4. What is the difference between an ETF and an index fund?

Both can track the same index, but an ETF is listed and traded on a stock exchange, whereas a conventional index mutual fund is generally bought and redeemed through the mutual fund structure at the applicable NAV.

5. Can Gold ETFs be traded on the stock market?

Yes, Gold ETF units can be listed and traded on stock exchanges, allowing investors to obtain exposure to gold without directly purchasing physical gold.

An ETF can reduce company-specific risk when it holds a diversified basket of securities, but it is not risk-free because its value can decline when the underlying market or assets decline.