Are you trying to figure out a smart way to invest your money in India’s changing market? This comprehensive guide will break down Exchange-Traded Funds (ETFs) for you, a popular and effective investment tool. While ETFs can seem complex, they are actually a simple and cost-effective tool for diversifying your portfolio. In this blog, we will explain everything about investing in ETFs in India, covering their types, benefits, and latest tax implications, to help you make a better-informed decision.
Table of Contents
What is an Exchange-Traded Fund (ETF)?
An Exchange-Traded Fund (ETF) is a mix of different investments, such as stocks or bonds, that trades on a stock exchange just like a regular stock. For Indian investors, this offers several advantages:
- Real-Time Trading: Unlike a regular mutual fund, ETFs can be bought and sold all day while the market is open at live prices, offering greater flexibility.
- Instant Diversification: By holding a basket of assets, ETFs help spread your risk across a broad portfolio.
- Lower Costs: They usually offer lower expense ratios, making them a cost-effective investment tool.
In India, most ETFs are passively managed to track a specific market index such as the Nifty 50 or BSE Sensex. While passively managed ETFs are the standard approach, actively managed options also exist, which aim to outperform their benchmarks but typically come with higher fees.
The Indian ETF market has shown significant momentum, with passive investing becoming more popular. For example, according to AMFI data, the total assets under management (AUM) in gold ETFs alone reached a record ₹1,021 billion by October 2025. The rise in retail investors is pushing this growth forward, highlighting a shift toward passive funds that track benchmarks.
How Exchange-Traded Funds (ETFs) Work
ETFs use a unique system that keeps their market price close to the value of their underlying assets. This is managed by large financial institutions called Authorized Participants (APs) through a process of creation and redemption.
Creation and Redemption Process
Authorized Participants (APs) are large institutions that deal directly with the ETF provider.
- Creation: When an ETF issuer needs more shares, the AP buys the underlying securities (like stocks in the Nifty 50) and delivers them to the issuer in a creation unit. In return, the AP receives new ETF shares of equal value.
- Redemption: When the market has excess ETF shares, the AP can buy them back from the market and redeem them with the issuer in exchange for the underlying securities.
How Arbitrage Keeps ETFs Fairly Priced
Arbitrage is how APs maintain the market price of an ETF in alignment with its actual value.
- Dealing with a Premium: When an ETF’s market price rises above its NAV, the AP can profit by creating more ETF shares and selling them, pushing the market price back down.
- Dealing with a Discount: If the ETF’s market price drops below its NAV, the AP can profit by buying the cheaper ETF shares and redeeming them, pushing the market price back up.
How Investors Trade ETFs
As a retail investor, you do not need to worry about this complex process. You simply buy and sell ETF shares on the stock exchange throughout the trading day, just like you would with a regular stock.
Types of ETFs in India
Here are the main types of exchange-traded funds available to Indian investors, each designed to meet different investment goals.
1. Equity ETFs
Equity ETFs invest in a diversified portfolio of company stocks. They are ideal for long-term wealth creation by tracking the performance of a wider market or a specific sectoral index. In India, examples include those tracking major indices, such as the Sensex and Nifty 50, as well as sectoral indices like the Nifty Bank.
Examples: Edelweiss Exchange Traded Scheme – NIFTY, ICICI Prudential NIFTY ETF, UTI Sensex ETF.
2. Commodity ETFs
Commodity ETFs allow you to invest in physical commodities like gold, silver, or other resources without requiring you to hold them physically. These funds can serve as a hedge against inflation and currency fluctuations.
Examples: Nippon Gold ETF, HDFC Gold ETF, ICICI Pru Silver ETF.
3. Debt ETFs
Also known as fixed-income ETFs, these funds invest in a collection of bonds and other fixed-income securities. They are suitable for risk-averse investors seeking stability, income, and cost-efficient exposure to the bond market.
Examples: Nippon India ETF Nifty 1D Rate Liquid BeES, DSP NIFTY 1D Rate Liquid ETF, and Bharat Bond ETFs.
4. International ETFs
For Indian investors looking to diversify their portfolio globally, international ETFs are the best option. They provide exposure to stocks and bonds in foreign markets and trade on Indian stock exchanges.
Examples: Motilal Oswal Nasdaq 100 ETF, Mirae Asset NYSE FANG+ ETF, Nippon Hang Seng ETF.
5. Thematic ETFs
Thematic ETFs focus on particular long-term trends or investment themes instead of just market capitalization. These can include themes like manufacturing, digitalization, or Electric Vehicles, allowing investors to target specific growth areas.
Examples: Mirae Asset Nifty India Manufacturing ETF, Tata Nifty India Digital ETF.
6. ESG ETFs
Environmental, Social, and Governance (ESG) ETFs are designed for investors interested in socially responsible organizations. They aim to include companies in their portfolios that meet particular ESG criteria, such as positive social impact, sustainable environmental practices, and strong corporate governance.
Examples: Mirae Asset Nifty 100 ESG Sector Leaders ETF, Nippon India Nifty 100 ESG Sector Leaders ETF.
7. Smart Beta ETFs
Smart Beta ETFs are a modern type of ETF that uses alternative weighting methods rather than the traditional market capitalization method. They adjust portfolios based on factors such as value, size, volatility, or momentum to potentially improve returns or minimize risk
Examples: ICICI Prudential Nifty Low Vol 30 ETF and Nippon India ETF NV20.
8. Leveraged and Inverse ETFs
Leveraged and inverse ETFs focus on boosting the returns of an underlying index or providing opposite returns to the index’s performance and are used for short-term trading. They are high-risk, short-term trading tools not ideal for most retail investors. Leveraged ETFs use financial derivatives to increase the index’s return potential, while inverse ETFs aim to deliver the opposite returns of an index.
How ETFs Compare with Mutual Funds and Stocks
Individuals often wonder which is better: an ETF, a mutual fund, or a stock. Each has its pros and cons, so let’s look at the key differences.
| Features | ETFs | Index Funds | Mutual Funds (Active) |
| Trading | Intraday trading on exchanges at market price. | Traded once daily at Net Asset Value (NAV). | Traded once daily at Net Asset Value (NAV). |
| Pricing | Fluctuates during the day based on market demand. | Based on daily NAV after market close. | Based on daily NAV after market close. |
| Management | Mostly passive, tracking an index. | Passive, replicating a specific index. | Actively managed by fund managers seeking to outperform the market. |
| Expense Ratio | Generally lower than index funds and mutual funds. | Low, but potentially slightly higher than comparable ETFs. | They can be significantly higher due to active management. |
| Demat Account | Required for investing. | Not required. They can be purchased directly from the Asset Management Company (AMC). | Not required. They can be purchased directly from the AMC. |
| SIPs | Some platforms offer them, but they are less commonly available or automated than mutual funds. | Readily available and easy to set up. | Readily available and easy to set up. |
| Tax Efficiency | Generally, they are more tax-efficient due to the in-kind creation/redemption process, resulting in fewer capital gains passed to investors. | They can be less tax-efficient than ETFs if fund managers sell securities to meet redemptions, triggering capital gains. | Tax efficiency varies based on activity and turnover. They can generate capital gains for investors. |
Benefits and Risks of Investing in ETFs
Exchange-Traded Funds (ETFs) offer investors several key advantages, which have made them a popular investment choice, especially in India. Their passive investment approach and lower expense ratio, compared to actively managed funds, are a major draw.
Benefits of Investing in ETFs
Here are some of the best advantages of ETFs:
1. Liquidity
Just like regular stocks, ETFs trade on stock exchanges throughout the day. This provides investors with trading flexibility and a high degree of liquidity, allowing them to buy or sell units at any point during market hours.
2. Diversification
Rather than investing in a single company, ETFs allow you to diversify your portfolio across several securities within an index, sector, or asset class. This helps to effectively manage and mitigate risks associated with individual stocks.
3. Transparency
Most ETFs disclose their holdings daily. This allows investors to clearly see the underlying securities they are investing in, which promotes better-informed investment decisions.
4. Cost Effectiveness
As ETFs are passively managed, they have lower management fees or expense ratios compared to actively managed mutual funds. This can have a major positive impact on your long-term returns.
5. Risk Reduction (Systematic Risk)
By diversifying your investment across a broad range of assets, such as stocks, bonds, or commodities, ETFs help reduce unsystematic risk (or company-specific risk). A loss in one particular asset can be offset by profits in other assets.
6. Tax Efficiency
Due to their unique structure and the process of in-kind creation and redemption, ETFs often have fewer taxable events, making them more tax-efficient than many mutual funds.
Disadvantages of Investing in ETFs
While ETFs have several advantages, investors must understand the associated risks and drawbacks.
1. Market Volatility
The value of an ETF is related to its underlying assets and is subject to market volatility. The impact depends on the ETF’s holdings. For example, a bond ETF may be less volatile than an equity ETF during market fluctuation.
2. Trading Costs
Although ETFs have a lower expense ratio, investors incur other trading costs. For frequent traders or those investing small amounts, brokerage commissions and the bid-ask spread can add up and affect overall returns.
3. Tracking Error
This refers to the performance gap between an ETF and its benchmark index. A higher tracking error indicates that the ETF is not accurately replicating the index’s performance. Fees, replication methods, and transaction costs are common reasons for this difference.
4. Liquidity Risk
While most ETFs are highly liquid, less popular or niche ETFs may have lower trading volumes, resulting in a wider bid-ask spread. This can make it difficult to buy or sell units at a fair market price.
Steps to Invest in an ETF
Here are the steps on how to invest in an ETF:
Zerodha, Groww, and Upstox are some of the platforms you can go for when opening an account.
Step 2: Sign Up For a Demat Account
Before proceeding to invest in ETFs, you need to have a demat account. You will be required to complete KYC. The platform’s interface and services might be new for you, so familiarise yourself first with it.
Step 3: Explore Your Options
Check different ETF options on your demat account that are suitable for your financial objectives and investment timeframe. Check factors like ETFs’ expense ratios, underlying assets, and liquidity, and choose the one that meets your needs.
Here is an example:
| ETF Name | Underlying Assets | 1 Year Return | Expense Ratio | Tracking Error |
| SBI Nifty ETF | Nifty 50 Index | 15.8% | 0.17% | 0.11% |
| Bharat Bond ETF | Government bonds | 8% | 0.12% | 0.21% |
SBI Nifty ETF might be a better choice if your priority is higher returns, but for lower expenses, Bharat Bond ETF is preferred.
Step 4: Enter Your Order
Log in to the trading account and visit the order placement section, and enter the name of the ETF you want to purchase.
Step 5: Quantity and Price
The number of ETF units you want to buy, mention it in the order entry form. You can use a limit order and set the desired price per unit, too. Verify the order details to ensure that they match your investment criteria.
Step 6: Track and Adjust
Once the order is placed, you can monitor your investment status through your trading account. Track price changes and market news that may affect your investment. Furthermore, regularly check your investment portfolio.
Also Check: How to Choose Mutual Funds to Invest
These ETFs delivered the highest returns in 2025, making them ideal for investors seeking performance-focused returns.
| Rank |
ETF Name |
1-Year Return (%) |
2-Year Return (%) |
3-Year Return (%) |
Expense Ratio (%) |
| 1 |
Mirae Asset NYSE FANG+ ETF (MAFANG) |
50.05 |
52.4 |
53.79 |
0.65 |
| 2 |
CPSE ETF |
-8.85 |
31.35 |
38.52 |
0.07 |
| 3 |
Motilal Oswal SP BSE Enhanced Value ETF |
-4.43 |
27.59 |
38.1 |
0.31 |
| 4 |
Kotak Nifty PSU Bank ETF |
7.87 |
18.71 |
36.67 |
0.49 |
| 5 |
Nippon India ETF Nifty PSU Bank BeES |
7.87 |
18.73 |
36.65 |
0.49 |
| 6 |
ICICI Prudential Silver ETF |
50.07 |
37.59 |
34.26 |
0.40 |
| 7 |
Aditya Birla Sun Life Silver ETF |
55.74 |
40.25 |
35.9 |
0.35 |
| 8 |
HDFC Silver ETF |
54.35 |
40.62 |
35.81 |
0.45 |
| 9 |
NIPPON India Silver ETF |
55.24 |
39.85 |
35.55 |
0.56 |
| 10 |
DSP Silver ETF |
55.52 |
40.01 |
35.57 |
0.40 |
Note: This performance is based on the returns of the underlying Mutual Fund.
How ETF Returns are Taxed in India
The latest tax structure for exchange-traded funds (ETFs) in India depends on the type of ETF (equity, gold, debt, or international), the holding period, and recent changes announced in the Union Budget 2024 and Finance Bill 2025.
ETF tax rules for 2025-26
| ETF Type |
Holding Period |
Investment Date |
Tax Rate & Rules |
Equity ETFs
(Invests ≥65% in Indian equities) |
Short-Term (< 12 months) |
Any period |
20% flat rate, plus applicable surcharge & cess. This rate is effective from July 23, 2024.
|
| Long-Term (> 12 months) |
Any period |
12.5% on gains exceeding ₹1.25 lakh, with no indexation benefit. The LTCG exemption limit increased to ₹1.25 lakh from ₹1 lakh, effective for sales on or after July 23, 2024.
|
Debt ETFs
(< 35% Indian equities) |
Any period |
On or after Apr 1, 2023 |
Taxed at your individual income tax slab rate, with no indexation benefit.
|
| Short-Term (≤ 24 months) |
On or before Mar 31, 2023, sold on or after July 23, 2024 |
Taxed at your individual income tax slab rate.
|
| Long-Term (> 24 months) |
On or before Mar 31, 2023, sold on or after July 23, 2024 |
12.5%, without indexation benefit. The holding period for LTCG was reduced from 36 months to 24 months.
|
| Gold & Silver ETFs |
Short-Term (< 12 months) |
On or after Apr 1, 2025 |
Taxed at your individual income tax slab rate.
|
| Long-Term (> 12 months) |
On or after Apr 1, 2025 |
12.5%, with no indexation benefit.
|
International ETFs
(listed in India) |
Any period |
On or after Apr 1, 2023 |
Taxed at your individual income tax slab rate, regardless of the holding period.
|
| Short-Term (≤ 24 months) |
On or before Mar 31, 2023, sold on or after July 23, 2024 |
Taxed at your individual income tax slab rate.
|
| Long-Term (> 24 months) |
On or before Mar 31, 2023, sold on or after July 23, 2024 |
12.5%, without indexation benefit.
|
Dividend income taxation for 2025-26
- For Fiscal Year (FY) 2025–26, dividend income is taxed at your individual income tax slab rate.
- A 10% Tax Deducted at Source (TDS) applies to residents only when the dividend from a specific company or mutual fund exceeds ₹10,000.
- The TDS rate is 20%, but a lower rate may apply based on Double Taxation Avoidance Agreements (DTAA) for non-residents.
Future of ETFs in India
The Indian ETF market is growing fast. Although ETF was introduced in 2001 in India, it has made a significant impact on the Indian economy. The trading volume has jumped from ₹26,139 crore in FY 2016-17 to ₹1,83,676 crore in FY 2023-24, which is an increase of about 600%. The Equity ETF’s AUM has consistently increased over the last 5 years.
The ETF market is on track to exceed ₹16.8 lakh crore (AU$300 bn) in 2025. The Indian ETF market has seen growth over the years, expanding by over 30% yearly, indicating India’s shift towards global passive investing norms. India-focused ETFs are growing in popularity, with increased government spending and monetary easing boosting market growth.
With projections indicating a doubling of the Indian Mutual Fund industry’s size to Rs 100 lakh crore by 2030, it is expected that ETFs and index funds will be a major force behind the growing penetration, contributing 25-30% to the mutual fund industry’s total AUM.
Conclusion
Ultimately, ETFs are a modern, efficient way to invest in a wide variety of markets. They provide access to global markets without needing to pick individual stocks or time the market perfectly. They empower you to take control of your investment journey with a simple, low-cost approach. A little planning goes a long way, using tools like an ETF calculator to visualize your potential growth and start planning your investment journey today.
Exchange-Traded Funds (ETFs) – FAQs
Q1. Are ETFs worth investing?
ETFs can be a suitable investment if you are looking for easy market access, low costs, and built-in diversification. They are perfect for beginners and long-term investors. However, your decision should align with your specific financial goals, risk tolerance, and investment horizon.
Q2. Where to buy Exchange Traded Funds?
In India, you can purchase ETFs on the stock exchange (such as the NSE or BSE) through a Demat and trading account with a registered stockbroker. Most online brokerage platforms, such as Groww or HDFC Sky, offer ETF trading.
Q3. Is an ETF better than a stock?
Neither an ETF nor a stock is inherently better, as they serve different purposes. ETFs are generally safer due to their diversification across multiple securities, which reduces the risk associated with a single company. Stocks offer the potential for higher returns, but they also carry a significantly higher risk level, which depends entirely on the performance of that one company. The best choice depends on your investment goals and risk tolerance.
Q4. What is a Gold ETF?
A Gold ETF tracks the price of physical gold, allowing you to invest in the precious metal without the hassle of buying and storing it physically. It can be a useful tool for diversifying your portfolio and hedging against inflation.
Q5. What is the difference between an ETF and Index Fund?
Both ETFs and index funds are passive investments that track a market index. The key difference lies in their trading mechanism and accessibility:
Trading: ETFs are traded on a stock exchange throughout the day, just like stocks, with prices fluctuating based on real-time market demand. Index funds are traded only once a day at their end-of-day NAV.
Cost: ETFs often have slightly lower expense ratios than index funds.
Access: ETFs require a Demat and trading account, while index funds can be purchased directly through a mutual fund house.
Q6. How are ETFs different from mutual funds?
ETFs are traded throughout the day like stocks and usually have lower fees. In contrast, mutual funds only trade once every day at the NAV price.