To avoid fund manager risk, or the risk of stock-picking calls going wrong by the fund manager, passive funds are a good option to get an equity exposure. There are 54 exchange-traded funds (ETFs) and 22 index funds on offer, which track various stock market indices, according to Value Research. Usually, Mint Money has told you to consider ETFs on account of their superior structure and costs, but liquidity could be a practical problem when you go to buy or sell. What is liquidity and why is it important? The basics first.
What is an ETF?
An index fund invests in all the stocks—and in the same proportion—as those in the scheme’s benchmark index. A small percentage of its corpus, up to about 5%, may be held in cash to take care of inflows and outflows. An ETF does the same, but its mechanism is different. An ETF creates units, which are then available on the stock market for sale where investors like you can buy them. Every ETF appoints market makers who are generally stock brokers with the main task of creating enough liquidity in the market by standing as counter-party for whosoever wants to buy or sell ETFs, in case enough buyers and sellers are not available.
