What are Exchange Traded Funds (ETFs) and Should You Invest in Them?

Last Updated On: 12 Aug 2025

5 min read

Introduction

As an Indian investor explore smarter and diversified investment options, Exchange Traded Funds (ETFs) have gained significant traction. Combining the features of mutual fund schemes and stock trading, ETFs are increasingly being used by retail and institutional investors for long-term wealth creation. In this blog, we’ll explain what ETFs are, how they work, and whether they’re a good fit for your investment portfolio.

What is an ETF (Exchange Traded Fund)?

An ETF, or exchange traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund.

Think of it as a mutual fund scheme that you can buy or sell throughout the day on the stock market.

Key Features of ETFs:

Traded like stocks: You can buy/sell ETFs any time during market hours
Low expense ratio: Cost-effective compared to actively managed funds
Diversification: Invest in a range of assets through a single ETF
Transparency: Holdings are disclosed daily

How Do ETFs Work?

ETFs are designed to track the performance of a specific index or asset class. For example:

Nifty 50 ETF tracks the Nifty 50 index
Gold ETF tracks domestic gold prices
Debt ETFs invest in government securities or bonds
Silver ETF tracks domestic silver prices

When you invest in an ETF, you don’t directly own the underlying assets but you benefit from their performance. ETF units are listed and traded on the NSE or BSE in India, and their price fluctuates like any stock.

Types of ETFs in India:

Equity ETFs – Track indices like Nifty 50, Sensex, or sectoral indices
Gold ETFs – Invest in physical gold and track gold prices
Debt ETFs – Invest in government bonds or PSU debt
International ETFs – Offer exposure to global markets
Silver ETF – Invest in physical silver and track silver prices

Why Invest in ETFs?

Cost-Effective: Lower fees than actively managed mutual fund schemes
Diversification: Spread risk across multiple stocks or sectors
Liquidity: Easily tradable during market hours
Transparency: Daily disclosure of holdings
Tax Efficiency: Can be more tax-efficient depending on your holding period and strategy

Who Should Invest in ETFs? ETFs may be suitable for:

Beginners looking for low-cost index investing
Investors seeking transparency and liquidity
Those who want market exposure without actively managing a portfolio.
Those who prefer passive investment strategies
Individuals using goal-based investing for long-term growth

How to Invest in ETFs in India:

Open a Demat and trading account with a registered broker
Choose your preferred ETF (based on index, asset class, or sector)
Place a buy order during market hours
ETF units are credited to your demat account post settlement

Note: Some platforms allow Systematic Investment Plans (SIPs) for ETFs, but traditional SIPs are more common in mutual funds.

Conclusion

Exchange Traded Funds (ETFs) offer a flexible, cost-efficient, and transparent way to build a diversified portfolio. Whether you are a beginner or a seasoned investor, ETFs can serve as a powerful tool for long-term investing in Indian and global markets. However, it's important to align your ETF choices with your financial goals and risk profile.

Additional links:

What is a Mutual Fund? - Beginner's Guide to Investing

AMFI - Introduction to Mutual Funds

Know everything about SIP

What is an Exchange Traded Fund (ETF)

Why should you invest in an ETF?

SEBI Financial Education Booklet

Advantages of Exchange-Traded Funds (ETFs)

Exchange Traded Funds (ETFs) vs. Mutual Funds (MFs)

FAQs

What exactly is an ETF?

An ETF is a marketable security that tracks an index, commodity, or asset basket and is traded on stock exchanges like a regular stock.

How are ETFs different from mutual fund schemes?

ETFs trade on stock exchanges throughout the day, while mutual funds are bought or sold only at day-end NAV. ETFs usually have lower expense ratios.

Do I need a demat account to invest in ETFs?

Yes, since ETFs are traded on stock exchanges, a demat and trading account is required to invest.

Are ETFs good for long-term investing?

Yes, ETFs can be excellent long-term investments, especially for those following a passive strategy and looking for market-linked returns with low cost.

What are the risks involved in ETF investing?

ETFs are subject to market risk, index tracking error, and liquidity risks. They may also underperform the benchmark due to fund expenses.

Can I invest small amounts in ETFs?

Yes, you may start with a small number of ETF units, making it accessible for retail investors.

Are ETF returns taxable in India?

Yes. Tax treatment depends on the type of ETF (equity or debt). Equity ETFs are taxed like equity mutual fund schemes; debt ETFs are taxed as per debt fund schemes rules.

Can I receive dividends from ETFs?

Yes. Some ETFs offer dividend payout options, but many investors prefer growth options where gains accumulate over time.

Where can I track ETF performance?

You can track ETF prices and performance on stock exchange websites (NSE/BSE) or other investment platforms.

Is ETF investment suitable for beginners?

Yes. ETFs are ideal for beginners due to their simplicity, transparency, and low cost—especially index-based ETFs like Nifty 50 or Sensex ETFs.

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The information is for general purposes only and not an investment advice. Readers should seek professional advice before taking any investment related decisions.

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