A Complete Investor’s Guide to Exchange-Traded Funds
Exchange-Traded Funds (ETFs) are growing in popularity among Indian investors due to their low cost, simplicity, and diversification benefits. Whether you're a beginner or a seasoned investor, ETFs offer a powerful way to build wealth passively with minimal effort.
In this comprehensive India-specific guide, we’ll explore:
✅ What ETFs are
🔄 How they work in the Indian context
🧺 Types of ETFs available in India
🪙 How returns are generated
⚖️ Advantages and disadvantages
🛠️ How to invest in ETFs in India
🧠 Frequently asked questions (Indian edition)
📌 What Is an ETF?
An Exchange-Traded Fund (ETF) is a type of mutual fund that is listed and traded on stock exchanges, just like individual shares. ETFs hold a basket of assets — such as stocks, bonds, gold, or other commodities — and are designed to track a specific index or benchmark.
When you buy a unit of an ETF, you're indirectly investing in all the assets that the ETF holds. This makes ETFs an excellent tool for instant diversification and low-cost investing.
🏛️ How Do ETFs Work in India?
1. Underlying Index or Asset
ETFs are designed to track the performance of an index or asset. Some common examples in India include:
2. Trading Like Stocks
ETFs are listed on NSE and BSE.
You can buy and sell them during trading hours like any equity stock.
Prices change in real-time based on market demand and supply.
3. Net Asset Value (NAV) vs Market Price
Each ETF has a Net Asset Value (NAV) that reflects the value of its underlying assets. However, it trades at a market price that may be slightly higher or lower than the NAV due to market forces.
The gap between NAV and market price is called the tracking error, and low tracking error is a sign of a well-managed ETF.
4. Creation and Redemption in India
In India, large institutions called Authorised Participants (APs) or market makers help maintain liquidity by creating and redeeming ETF units.
They deliver or receive the underlying basket of securities to/from the ETF issuer in exchange for ETF units, helping keep prices in line with NAV.
🧺 Types of ETFs Available in India
India has a variety of ETFs to suit different investor needs:
🟢 1. Equity ETFs
Track major stock indices:
NIFTYBEES – Tracks Nifty 50 Index
SENSEX ETF – Tracks BSE Sensex
Bank Nifty ETF – Tracks Nifty Bank Index
Midcap ETFs – Tracks Nifty Midcap 150 or Nifty Next 50
🟡 2. Gold ETFs
Invest in physical gold (held in vaults) and track gold prices.
SBI Gold ETF
Nippon India Gold ETF
HDFC Gold ETF
Great for portfolio diversification and inflation hedge.
🔵 3. Bond ETFs
Invest in debt instruments like PSU bonds and government securities.
Bharat Bond ETF (April 2025, April 2031)
Offers fixed maturity and predictable returns
🟠 4. International ETFs
Track foreign indices like Nasdaq-100 or S&P 500.
Motilal Oswal Nasdaq 100 ETF
Navi US Total Stock Market Fund of Fund
Ideal for global diversification.
💰 How Do You Earn Returns From ETFs in India?
There are three ways to earn from ETFs:
Capital Gains
Sell ETF units at a price higher than your purchase price.
Example: Buy NIFTYBEES at ₹200 and sell at ₹250 = ₹50 gain per unit.
Dividends
Some ETFs pass on dividends from the underlying stocks.
Dividends are taxable in your hands as per your income tax slab.
Interest (in Debt ETFs)
Bharat Bond and other debt ETFs provide regular interest from bonds.
⚖️ Pros and Cons of Investing in ETFs in India
✅ Pros
Low Cost – Expense ratios as low as 0.05%
Diversification – Invest in 50 or 100+ companies in one ETF
Liquidity – Easy to buy/sell on NSE or BSE
Transparency – Portfolio is disclosed daily
Tax Efficiency – No exit load, and only taxed on selling
❌ Cons
Tracking Error – Some ETFs don’t perfectly follow their index
Liquidity Issues – Some ETFs have low trading volumes
No SIP Option on Exchanges – SIPs only through fund house or platforms
No Active Management – Most ETFs are passive; no manager to beat the market
🛠️ How to Invest in ETFs in India (Step-by-Step)
Open a Demat & Trading Account
With brokers like Zerodha, Groww, Upstox, ICICI Direct, etc.
Fund Your Account
Transfer money from your linked bank account.
Research ETFs
Use platforms like NSE India, Moneycontrol, or the AMC’s website.
Place a Buy Order
Search for the ETF by ticker (e.g., NIFTYBEES) and place a market/limit order.
Monitor Your Investments
Track performance, rebalance periodically based on your goals.
📘 Sample ETF Portfolio for Indian Investors
🧑🎓 Beginner (Low Risk, Diversified)
50% – NIFTYBEES (Large-cap exposure)
20% – Bharat Bond ETF (Fixed income)
20% – SBI Gold ETF (Inflation hedge)
10% – Motilal Oswal Nasdaq 100 ETF (International exposure)
🧓 Retirement-Focused
40% – Nifty 50 ETF (Growth)
30% – Bharat Bond ETF (Stability)
20% – Gold ETF (Inflation protection)
10% – Liquid ETF or Overnight Fund ETF
🧠 Frequently Asked Questions (FAQs) – India Edition
📌 Are ETFs safe in India?
Yes, ETFs are regulated by SEBI and managed by reputable AMCs (Asset Management Companies). While market-linked, they are considered safe for long-term investing when used properly.
📌 What is the minimum amount required to invest in ETFs?
You can start with the price of one unit — typically between ₹50 to ₹300 depending on the ETF. No large minimums like in mutual funds.
📌 Do ETFs in India offer SIP (Systematic Investment Plan)?
You can’t do SIPs directly via stock exchanges. However, some platforms (like Zerodha Coin, Groww) allow SIP-style investing into ETFs through mutual fund route or fund-of-fund (FoF) versions.
📌 How are ETFs taxed in India?
Note: Dividend income is added to your taxable income.
📌 Are ETFs better than mutual funds in India?
ETFs have lower costs, real-time trading, and better tax efficiency. Mutual funds, on the other hand, offer active management and easier SIPs. Both have their place depending on your goals.
📌 Can ETFs replace fixed deposits or PPF?
Debt ETFs like Bharat Bond offer higher returns than FDs, but with market risk. They are not as safe or guaranteed as FDs or PPF, but can be a tax-efficient alternative for long-term goals.
📌 What is the expense ratio of ETFs in India?
One of the biggest advantages! Expense ratios are as low as:
0.05% for Bharat Bond ETF
0.10% for Nifty 50 ETFs
<0.50% for most equity ETFs
Compare this to 1%–2% for mutual funds.
📌 Can NRIs invest in ETFs in India?
Yes, NRIs can invest in ETFs via NRE/NRO demat accounts under PIS (Portfolio Investment Scheme) rules. Some restrictions may apply depending on country of residence.
📌 Are ETFs good for long-term investing?
Yes, especially index ETFs like NIFTYBEES or SENSEX ETFs are excellent for long-term wealth creation due to compounding and low costs.
🏁 Final Thoughts
ETFs in India offer a modern, low-cost, and tax-efficient way to invest in equity, debt, gold, and even international markets. With increasing awareness and adoption, ETFs are quickly becoming a core component of diversified portfolios.
If you're looking for simplicity, transparency, and performance, ETFs deserve a place in your investment strategy.
%20%E2%80%93%20The%20Big%20Bull%20of%20Dalal%20Street'%20with%20the%20title%20clearly%20displayed%20in%20l.webp)
