Exchange-Traded Funds (ETFs) have become increasingly popular in India as a cost-effective and flexible investment option. They offer the diversification of mutual funds combined with the real-time tradability of stocks, making them suitable for both beginners and experienced investors.
If you are new to the markets, you may first want to read our Indian stock market basics guide.
What Is an ETF?
An ETF is a marketable security that tracks an index, commodity, sector, or basket of assets. Like mutual funds, ETFs hold a diversified portfolio, but unlike mutual funds, they can be traded on exchanges such as NSE and BSE throughout the trading day.
- Diversification similar to mutual funds
- Real-time buying and selling like stocks
- Lower fees compared to active funds
How ETFs Work
ETFs work by combining the ease of stock trading with the diversification of mutual funds.
1. Fund Structure
- ETFs are created by fund houses and backed by a portfolio of assets.
- Each ETF unit represents fractional ownership of the underlying assets.
2. Trading on Exchanges
- You can buy or sell ETF units during market hours at live market prices.
- Prices fluctuate like regular stocks, depending on demand and supply.
3. NAV and Market Price
- NAV (Net Asset Value) is calculated at the end of the day.
- Market price may differ slightly from NAV due to trading activity.
4. Demat Account Requirement
- You need a Demat and trading account to invest in ETFs.
Types of ETFs in India
- Index ETFs: Track market indices like Nifty 50, Sensex, Nifty Next 50.
- Sectoral ETFs: Focus on specific sectors like IT, Banking, Pharma.
- Gold ETFs: Track gold prices and provide an alternative to physical gold.
- Debt ETFs: Invest in government bonds or corporate debt instruments.
- International ETFs: Track global indices such as Nasdaq 100 or S&P 500.
- Commodity ETFs: Track commodities other than gold such as silver.
Benefits of Investing in ETFs
- Low Cost: Expense ratios are lower than active mutual funds.
- Diversification: Exposure to a broad set of assets in one purchase.
- Liquidity: Easily buy or sell on the exchange during trading hours.
- Transparency: Holdings are updated daily by fund houses.
- Flexibility: Suitable for short-term traders and long-term investors.
Risks of ETFs
- Market Risk: ETFs mirror the performance of their underlying index.
- Liquidity Risk: Some ETFs may have low trading volumes.
- Tracking Error: Slight deviation from the index performance.
- Price Variation: Market price may differ from NAV.
ETF vs Mutual Fund: Key Differences
- Trading: ETFs trade like stocks; mutual funds do not.
- Pricing: ETF prices vary throughout the day; mutual funds have end-of-day NAV.
- Cost: ETFs usually have lower expense ratios.
- Minimum Investment: ETFs allow buying even a single unit.
To understand a related passive investing option, you may read our guide on index funds.
How to Invest in ETFs in India
1. Open a Demat and Trading Account
- Required for buying and selling ETF units.
2. Select the Type of ETF
- Choose depending on your investment goals and risk tolerance.
3. Check Tracking Error and Expense Ratio
- Lower tracking error and lower expenses are preferred.
4. Place a Buy Order
- Buy ETF units on the exchange just like a regular stock.
5. Hold Long Term or Trade Short Term
- ETFs can be used for long-term investing or active trading.
Who Should Invest in ETFs?
- Beginners seeking low-cost diversification
- Investors who prefer passive strategies
- Those looking to track an index without stock picking
- Individuals wanting global exposure via international ETFs
- Investors comfortable using a Demat account
Final Thoughts
ETFs offer a simple, cost-effective, and flexible way to invest in diversified assets. With lower expenses, transparency, and accessibility, ETFs are an excellent option for both new and experienced investors in India. Whether your goal is long-term wealth creation or efficient market tracking, ETFs can play a valuable role in your portfolio.
SEBI Compliance and Legal Note
This article is for educational purposes only and should not be considered financial advice.
Information is sourced from SEBI, NSE, and BSE.
Investors may use the SEBI SCORES platform for official complaints.
Please consult a SEBI-registered financial advisor before investing.