What Are ETFs?

An Exchange-Traded Fund (ETF) can be thought of as a basket of assets, such as stocks, bonds, or even gold. When you purchase a single unit of an ETF, you effectively own a proportionate share of all the assets within that basket. For instance, a Nifty 50 ETF includes shares of the 50 companies listed in the Nifty index, allowing you to invest in all of them with a single transaction instead of buying each stock individually.

The key difference between ETFs and mutual funds lies in how they are traded. While mutual funds are priced once a day, ETFs are traded throughout the day on the stock exchange, with prices changing in real time. This flexibility makes ETF investment suitable for both long-term holding and short-term trading.

ETFs Category

ETFs in India can be divided into four broad groups. Each offers something unique.

  • Equity ETFs: Track stock indices like Nifty 50 or Sensex, providing easy access to the stock market.
  • Debt ETFs: Invest in government or corporate bonds, offering more stability.
  • Gold ETFs: Follow gold prices, eliminating the need to buy or store physical gold.
  • Silver ETFs: Track silver prices and allow investment in silver without physically holding the metal.
  • Global ETFs: Track foreign markets like the S&P 500 to enable simple international diversification.

These categories help investors spread their money across different assets, reducing risk and enhancing portfolio balance.

How Do ETFs Work?

ETFs may sound tricky at first. But once you break it down, they are easy to understand.

  • Creation: A fund house puts together a basket of assets. This could be stocks, bonds, or even gold. From this basket, they create ETF units.
  • Listing:These units are listed on stock exchanges such as the NSE or BSE , just like company shares.
  • Trading:You can buy or sell these ETF units during market hours. Prices change throughout the day, depending on demand and supply.
  • Liquidity: : Market makers ensure smooth trading. They make sure you always find a buyer when you want to sell and a seller when you want to buy.
  • Expense ratios:a small fee charged by the fund house to manage the ETF. For ETFs, this cost is usually very low compared to other funds.

With a demat account, buying an ETF is just like buying a stock — simple, quick, and convenient, making ETF investment accessible for both beginners and experienced investors.

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Types of ETFs

ETFs in India are designed to meet diverse investment needs, offering a simple way to diversify your portfolio across various assets and strategies. Here are some of the most common types of ETFs available for investors:
  • Broad-Market ETFs

    These track major stock indices, such as the Nifty 50 or Sensex , giving investors exposure to a wide range of companies in a single investment. They are ideal for those seeking to replicate overall market performance.

  • Gold ETFs

    These track the price of gold, allowing investors to gain exposure to the precious metal without buying or storing physical gold. They offer a convenient and cost-effective way to invest in gold.

  • Bond ETFs

    Also known as debt ETFs, they invest in government or corporate bonds and offer relatively stable returns. Suitable for conservative investors looking for regular income with lower risk than equities.

  • Sector ETFs

    These focus on specific sectors of the economy, such as banking, IT, or pharmaceuticals, enabling investors to target industries they expect to perform well.

  • Others

    Some ETFs follow specialised strategies, such as value, momentum, or low-volatility stocks. Examples include the Nifty 200 Momentum 30 ETF and the Nifty50 Value 20 ETF, which aim to capitalise on specific market trends or stock characteristics.

Choosing the right ETF type can help investors efficiently diversify their portfolios while managing risk and potential returns.

Advantages of Investing in ETFs

ETFs are increasingly popular among investors due to their clear and practical benefits.
  • DiversificationDiversification

    Investing in a single ETF allows you to spread your risk across multiple securities, reducing exposure to any one asset.

  • Low CostLow Cost

    ETFs generally have expense ratios below 1%, making them a cost-effective choice compared to actively managed funds.

  • LiquidityLiquidity

    ETFs can be bought or sold at any time during market hours, offering the flexibility to enter or exit positions as needed.

  • TransparencyTransparency

    Holdings are updated daily, so you always know exactly what you own.

  • FlexibilityFlexibility

    ETFs can be used for both long-term wealth creation and short-term trading strategies.

  • InvestmentSmall-ticket Investment

    You can start with just one unit, making it accessible for investors with limited capital.

  • Tax EfficiencyTax Efficiency

    Lower portfolio churn leads to fewer taxable events.

  • Peace of MindPeace of Mind

    There’s no need to track multiple individual shares, simplifying portfolio management.

ETF Funds vs Mutual Funds

Both ETFs and mutual funds offer diversification, but they differ in features and trading. Here’s a closer look at how they differ:

FeatureETF FundsMutual Funds
TradingTrade like shares on NSE/BSEBought or sold at daily NAV
CostLower feesHigher fees
LiquidityAnytime during market hoursOnly at the end-of-day NAV
PricingReal-timeFixed once daily
TransparencyDaily disclosureMonthly or quarterly disclosure
Best forCost-conscious, active investorsHands-off, long-term investors

In a nutshell:

  • ETFs suit those who like control.
  • Mutual funds suit those who want convenience.
  • You can hold both for a more balanced portfolio.

How to Choose the Right ETF Fund

Selecting the right ETF to invest in can seem overwhelming, but a systematic approach makes the process simpler and more effective. By considering a few key factors, you can choose the top ETF in India that aligns with your financial goals, risk appetite, and investment strategy.
  • Set Your GoalSet Your Goal

    Determine whether you are seeking long-term growth, capital preservation, or exposure to global markets. Your objective will guide the type of ETF you choose.

  • Check the IndexCheck the Index

    Understand whether the ETF tracks a broad market index like the Nifty 50 or a sector- or theme-specific index. This helps you know what assets you’re gaining exposure to.

  • Look at LiquidityLook at Liquidity

    ETFs with higher trading volumes are easier to buy and sell without impacting prices.

  • Check Expense RatioCheck Expense Ratio

    Lower fees ensure more of your returns stay in your pocket over time.

  • Review Tracking ErrorReview Tracking Error

    Assess how closely the ETF follows its underlying index. A lower tracking error is preferable.

  • Look at Past PerformanceLook at Past Performance

    Compare the ETF’s returns with its index to gauge consistency.

  • Check Fund SizeCheck Fund Size

    Larger assets under management (AUM) often indicate stability.

For beginners, starting with simple, broad-market index ETFs is usually the safest and simplest option.

Tax Implications off ETFs in India

ETFs in India are subject to specific tax regulations, and understanding these is essential for effective investment planning.
Equity ETFs
If you sell within 12 months (short term), gains are taxed at 20% under section 111A.
If you sell after 12 months (long term), gains above ₹1,25,000 in a financial year are taxed at 12.5% (no indexation) for sales on or after 23 July 2024.
Debt & Non-equity ETFs
Gains (short-term or long-term) are taxed as per your income tax slab rate.
For units purchased on or after 1 April 2023, long-term gains do not get indexation benefits.
Gold ETFs
Treated as non-equity assets.
If held for 12 months or less, the gain is treated as short-term and taxed per your slab rate.
If held longer than 12 months, gains are taxed at 12.5% (without indexation) on sales done after 23 July 2024.

Risks Associated with ETFs

While ETFs offer diversification and flexibility, they are not completely risk-free. Understanding the potential risks can help investors make informed decisions and manage their portfolios more effectively.
  • Market Risk

    The value of ETFs can decline if the overall market or the underlying assets fall.

  • Liquidity Risk

    Some ETFs have low trading volumes, making it harder to buy or sell units quickly without affecting the price.

  • Tracking Error

    An ETF may not perfectly replicate its underlying index, leading to slight differences in returns.

  • Concentration Risk

    Sector- or thematic-ETFs can be highly volatile because they focus on a specific industry or theme.

  • Currency Risk

    For international ETFs, fluctuations in foreign exchange rates can impact returns when converted to Indian rupees.

Being aware of these risks helps investors set realistic expectations and avoid surprises while investing in ETFs.

Why Invest in ETFs with Findoc?

Investing in ETFs is simple and convenient with Findoc. The platform offers a user-friendly interface that allows you to trade ETFs quickly and efficiently. Backed by expert research, Findoc provides insights into the top ETFs in India, helping you make informed decisions and choose investments that align with your financial goals. With low brokerage fees, you can keep costs minimal and make your portfolio more efficient, ensuring more of your money is put to work.

Beyond trading, Findoc focuses on investor education, offering blogs, tips, and dedicated support for beginners. This guidance helps new investors understand ETF investing, manage risk, and navigate the market with confidence. Whether you are starting your investment journey or expanding your portfolio, Findoc provides the right tools, insights, and support, making ETF investing accessible, informed, and secure for everyone.