ETFs hold a portfolio designed to mirror an index. Their price fluctuates intraday based on supply, demand, and the value of underlying securities. Investors buy and sell units through a broker or trading app.

What types of ETFs are available in India?

Common categories include equity index ETFs (e.g., Nifty, Sensex), sector/thematic ETFs, debt ETFs, gold ETFs, and international index ETFs. Each tracks a different underlying benchmark or asset.

How are ETFs different from mutual funds?

ETFs trade on exchanges in real time, usually have lower expense ratios, and do not offer SIPs or NAV-based end-of-day pricing like traditional mutual funds. Mutual funds are bought/sold with the AMC at day-end NAV.

What are the costs of investing in ETFs?

Costs generally include a low annual expense ratio and brokerage/transaction charges when buying or selling on the exchange. There may also be the impact of the bid-ask spread.

What risks should I consider with ETFs?

Key risks include market risk, tracking error (deviation from the index), liquidity risk (wider spreads/low volumes), and—for niche ETFs—concentration or sector risk.

How do I buy or sell an ETF?

Open a demat and trading account with a broker, search for the ETF’s ticker, and place buy/sell orders during market hours like any stock. Units are held in your demat account.

How are ETFs taxed in India?

Taxation depends on the ETF type. Equity ETFs follow equity capital gains rules, while debt or gold ETFs follow non-equity taxation. Check prevailing tax laws or consult a tax advisor for specifics.

Exchange Traded Funds (ETFs): Meaning, Types, and Benefits

Q: What is an Exchange Traded Fund (ETF)?

An ETF is a market-listed fund that typically tracks an index, commodity, or basket of assets. It trades like a stock on an exchange while offering diversification similar to mutual funds.

Q: Who should invest in ETFs?

ETFs suit investors seeking low-cost, diversified, and transparent exposure to an index or asset class. They are useful for long-term, passive investing as well as tactical allocations.

AssetPlus
Aug 31
5 min read

Updated: Sep 4

In recent years, Exchange Traded Funds (ETFs) have gained popularity among investors worldwide, including in India. They combine the features of mutual funds with the flexibility of stock market trading, offering investors a convenient way to diversify their portfolios.

If you are exploring efficient and cost-effective investment options, ETFs deserve your attention. In this article, we’ll break down what ETFs are, the different types available, and the benefits they bring to investors.

Exchange Traded Funds (ETFs): Meaning, Types, and Benefits

What is an Exchange Traded Fund (ETF)?

An Exchange Traded Fund (ETF) is an investment fund that pools money from investors to buy a basket of securities - such as stocks, bonds, or commodities. What makes ETFs unique is that they are listed and traded on stock exchanges, just like individual company shares.

This means you can buy and sell ETF units throughout the trading day at market prices, unlike traditional mutual funds where purchases and redemptions happen only once at the end of the day based on Net Asset Value (NAV).

In India, ETFs are regulated by the Securities and Exchange Board of India (SEBI), ensuring transparency and investor protection.

How Do ETFs Work?

Asset management companies (AMCs) create ETFs by assembling a portfolio of securities, typically designed to track a specific index like the Nifty 50 or Sensex.
These ETFs issue units, which are listed on exchanges such as the NSE and BSE.
Investors can buy and sell units through their Demat and trading accounts, just as they would with stocks.

Because ETFs track indices or specific assets, their performance closely mirrors that of the underlying portfolio.

Types of ETFs in India

ETFs come in different forms, catering to various investment needs. Here are the most common types:

1. Equity ETFs

These track stock market indices such as the Nifty 50, Sensex, Nifty Bank, or sectoral indices (e.g., IT, Pharma). They are ideal for investors seeking equity exposure with lower costs than actively managed funds.

Example: Nippon India Nifty 50 ETF.

2. Debt ETFs

These invest in fixed-income securities like government bonds or corporate debt. They offer stable returns and are suitable for conservative investors.

Example: Bharat Bond ETF.

3. Commodity ETFs

These ETFs track the price of commodities such as gold or silver. Gold ETFs are especially popular in India, offering an easy alternative to buying physical gold.

Example: SBI Gold ETF.

4. International ETFs

These allow Indian investors to access global markets by tracking foreign indices such as the S&P 500 or Nasdaq. They provide geographical diversification.

Example: Motilal Oswal Nasdaq 100 ETF.

5. Thematic and Sectoral ETFs

These track specific themes or sectors such as infrastructure, energy, or technology. They allow targeted exposure to industries expected to perform well.

Example: ICICI Prudential Nifty IT ETF.

6. Smart Beta ETFs

These follow customized indices that apply specific rules, such as weighting stocks based on value, momentum, or volatility, instead of traditional market-cap-based indices.

Example: Nippon India Nifty Alpha Low Volatility 30 ETF.

Key Benefits of ETFs

1. Diversification

By investing in one ETF, you gain exposure to a broad range of securities. For example, a Nifty 50 ETF gives access to India’s top 50 companies across sectors.

2. Low Cost

ETFs generally have lower expense ratios compared to actively managed mutual funds because they are passively managed (tracking an index rather than relying on active fund managers).

3. Liquidity and Flexibility

Since ETFs trade on exchanges, you can buy and sell them anytime during market hours. This offers flexibility, unlike mutual funds that process transactions only once a day.

4. Transparency

Most ETFs disclose their portfolio daily, so investors know exactly what they own. This makes them more transparent compared to many mutual funds that disclose holdings only monthly.

5. Tax Efficiency

In India, ETFs enjoy similar tax treatment as mutual funds. Equity ETFs attract short-term capital gains (STCG) tax of 15% if sold within a year and long-term capital gains (LTCG) tax of 10% beyond ₹1 lakh if held for more than a year. Debt ETFs are taxed as per the new mutual fund debt taxation rules.

6. Global Exposure

International ETFs allow Indian investors to diversify beyond domestic markets, reducing country-specific risk and opening opportunities in global leaders like Apple, Google, or Amazon.

7. Accessibility

ETFs can be bought in small units just like shares, making them accessible to retail investors. You only need a trading and Demat account to start investing.

ETFs vs. Mutual Funds

While ETFs and mutual funds share similarities, here are the main differences:

Feature	ETFs	Mutual Funds
Trading	Listed on stock exchanges, bought/sold anytime during trading hours	Bought/sold only at day-end NAV
Management Style	Mostly passive (index-tracking)	Active or passive
Expense Ratio	Generally lower	Can be higher, especially in actively managed funds
Liquidity	High, can be traded like stocks	Moderate, only redeemable at NAV
Transparency	Daily disclosure of holdings	Monthly disclosure of holdings

Who Should Invest in ETFs?

First-time investors who want simple exposure to an index at a low cost.
Experienced investors seeking to diversify their portfolios with international or thematic ETFs.
Cost-conscious investors who want low expense ratios.
Stock market participants comfortable with trading through a Demat account.

Conclusion

Exchange Traded Funds (ETFs) are a smart way to invest in diversified assets with the ease of stock market trading. They combine the benefits of mutual funds — diversification and professional management — with the flexibility of shares.

For Indian investors, ETFs can be a cost-effective entry point into equity, debt, gold, or even international markets. While mutual funds remain the go-to vehicle for systematic investment (through SIPs), ETFs are steadily gaining traction as investors look for transparency, liquidity, and lower costs.

As always, the choice between ETFs and other instruments should align with your financial goals, risk tolerance, and investment horizon.

FAQs

Do I need a Demat account to invest in ETFs?

Yes. Unlike mutual funds, ETFs are traded like shares, so you need a trading and Demat account.

Can I do a SIP in ETFs?

Not directly. ETFs do not support SIPs like mutual funds. However, you can set up a systematic investment plan through your broker by buying ETF units regularly.

Are ETFs better than mutual funds?

Neither is “better” universally. ETFs are cheaper and more transparent, while mutual funds offer SIPs and active management. The choice depends on your goals.

Are ETFs safe?

ETFs carry market risks similar to the assets they track. However, their transparency and diversification make them relatively safer than picking individual stocks.

What is the minimum amount required to invest in an ETF in India?

You can start with the price of one unit of an ETF, which may range from a few hundred to a few thousand rupees, depending on the scheme.