What are Exchange Traded Funds (ETFs)?
- Apr 10
- 5 min read
Updated: Jul 12
An Exchange Traded Fund is a type of investment fund that is listed and traded on a stock exchange, just like a share. But unlike a share, which represents ownership in a single company, an ETF represents ownership in a diversified basket of securities.
The key idea behind an ETF is that it tracks an underlying index or benchmark. For example, a Nifty 50 ETF holds all 50 stocks that make up the Nifty 50 index, in the same proportion as the index itself. When the Nifty 50 rises or falls, the ETF rises or falls by approximately the same amount.
An ETF (Exchange Traded Fund) is a passively managed fund that tracks an index, commodity, sector, or asset class, listed and traded on a stock exchange in real time.
Think of an ETF as a container. Inside that container are securities such as stocks, bonds, or commodities, arranged to mirror a specific index. When you buy one unit of a Nifty 50 ETF, you are buying a tiny slice of all 50 companies in that index simultaneously.
Because ETFs are listed on the exchange, their prices move throughout the trading day based on supply and demand, just like shares. This intraday pricing is one of the features that distinguishes ETFs from regular mutual funds, which are priced once at the end of each trading day at their NAV.
Types of ETFs available in India
The Indian ETF market has grown significantly over the past decade. Today, you can invest in a wide range of ETF types.
Equity ETFs are the most popular category. These track stock market indices such as the Nifty 50, Nifty Next 50, Nifty 100, BSE Sensex, Nifty Midcap 150, and sector-specific indices like the Nifty Bank or Nifty IT.
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Gold ETFs allow you to invest in gold in electronic form, without the hassle of physical storage. Each unit of a Gold ETF represents one gram of gold.
Debt ETFs track indices composed of government securities or bonds. The Bharat Bond ETF, launched by the government of India, is a prominent example.
International ETFs give Indian investors access to global markets. Some ETFs track the Nasdaq 100 (US technology companies) or the S&P 500 (top 500 US companies).
One of the most compelling reasons investors choose ETFs is their low cost. Because they simply replicate an index without active stock picking, the expense ratios of ETFs are among the lowest in the fund industry, far below the 1% to 2% that actively managed funds often charge.
ETFs also offer transparency. Since they track a publicly known index, you always know exactly which securities the fund holds. There are no surprises from fund manager decisions.
Additionally, ETFs provide liquidity and flexibility. You can buy or sell an ETF at any point during market hours, at the current market price, without being bound by end-of-day NAV pricing.
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Assets under management (AUM) in India’s ETF segment has grown from under Rs 1 lakh crore in 2017 to over Rs 9 lakh crore in 2026, a 9x increase in under a decade. This growth reflects both the expansion of EPFO’s ETF investments and rising retail investor participation.
ETFs vs Mutual Funds: what is the difference?
This is one of the most common questions among Indian investors, and rightfully so. Both ETFs and mutual funds pool investor money to buy a collection of securities. But there are key structural differences.
The table below provides a clear side-by-side comparison.
Parameter | ETF | Mutual Fund |
Trading | Traded on stock exchange like shares | Bought/sold at end-of-day NAV |
Pricing | Price fluctuates throughout the day | Single NAV declared once a day |
Minimum Investment | Price of 1 unit on the exchange | As low as Rs 500 via SIP |
Expense Ratio | Generally lower (0.05% to 0.5%) | Generally higher (0.5% to 2%+) |
Demat Account | Mandatory | Not required |
Fund Manager Role | Passive: tracks an index | Active or passive depending on type |
Transparency | Real-time portfolio visibility | Monthly portfolio disclosure |
No exit load; brokerage applies | Exit load may apply on early exit |
The most fundamental distinction is in how you buy and sell them. A mutual fund transaction is processed at the end-of-day NAV, regardless of when you place the order. An ETF transaction happens in real time on the exchange, at a price that fluctuates throughout the trading day.
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Another key difference is the requirement for a Demat account. To invest in ETFs, you need a Demat and trading account with a broker. Regular mutual funds can be bought directly through the AMC’s website, MF Central, or platforms like Groww or Kuvera, without needing a Demat account.
Mutual funds, especially those with a Systematic Investment Plan (SIP) facility, also make it easier to invest small, regular amounts automatically. ETF investing is typically more suited to lump-sum investments, though some platforms now support SIPs into ETFs as well.
ETFs are a particularly good fit for investors who believe in passive investing and want low-cost, transparent exposure to a specific market segment. If you want to track the Nifty 50 or the Nifty Bank index at the lowest possible cost and have an existing Demat account, an ETF is a strong choice.
They are also well suited for investors who already have a Demat account and are comfortable making buy and sell decisions on an exchange platform.
That said, ETFs come with their own set of considerations. One risk is tracking error, which is the small gap between the ETF’s returns and the index it tracks, caused by factors like expense ratios, timing differences, and cash holdings.
Before investing in any ETF, check its Average Daily Volume (ADV) on the exchange. Low-volume ETFs can have wide bid-ask spreads, meaning you may pay more to buy or receive less when you sell than the underlying index value would suggest.
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Disclaimer
The content on this website is for informational and educational purposes only and should not be construed as investment advice, a recommendation, or a solicitation to buy or sell any security, mutual fund, or financial instrument. Equity Research India is not a SEBI-registered investment advisor or research analyst, and nothing on this site constitutes personalized financial advice.
Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing. Past performance is not indicative of future returns. NAV, returns, rankings, and other data may change and may not reflect the most current information at the time of reading.
Readers should conduct their own due diligence and consult a SEBI-registered financial advisor before making any investment decisions. Equity Research India and its authors accept no liability for any loss or damage arising from the use of this content.
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