What is ETF? Meaning, Types, and How to Invest in India (2025)

This article covers the essentials of Exchange Traded Funds (ETFs) in the Indian context for FY 2025-26. We analyze the structure, types (Equity, Gold, Debt), and taxation rules effective November 2025. The guide explains how ETFs combine stock-like trading with mutual fund diversification, offering a low-cost investment route (expense ratios as low as 0.05%) for Indian investors. You will also find a step-by-step guide to investing via your Demat account.

An Exchange Traded Fund (ETF) is a basket of securities that trades on the stock exchange, just like a single stock. Imagine a product that gives you the diversification of a mutual fund but the trading flexibility of a share—that is an ETF. Whether you want to track the Nifty 50, invest in gold without storage hassles, or buy government bonds, ETFs allow you to do it with a single click during market hours. With India’s mutual fund industry AUM crossing ₹80 lakh crore in late 2025, ETFs have become a preferred tool for smart investors seeking low costs and real-time liquidity.

Meaning of ETF

At its core, an Exchange Traded Fund (ETF) is a passive investment vehicle that pools money from investors to buy a basket of assets—stocks, bonds, or commodities. Unlike active mutual funds where a fund manager tries to beat the market, most ETFs simply try to mirror a specific index (like the Nifty 50 or Sensex).

When you buy one unit of an ETF, you indirectly own a fraction of all the underlying assets in that index. For example, if you buy one unit of a Nifty 50 ETF, you are effectively buying a tiny portion of all 50 companies in the Nifty index, in the exact same proportion.

Key Difference from Mutual Funds

The biggest difference lies in how they trade:

• Mutual Funds: You buy or sell at the Net Asset Value (NAV), which is calculated only once at the end of the trading day.
• ETFs: You buy or sell on the stock exchange (NSE/BSE) throughout the day (9:15 AM to 3:30 PM). The price fluctuates second-by-second based on demand and supply.

Indian Examples

• Nippon India ETF Nifty BeES: Tracks the Nifty 50 index.
• SBI ETF Nifty 50: Another popular option tracking India’s top 50 companies.
• HDFC Gold ETF: Tracks the price of physical gold.
• Bharat Bond ETF: Tracks a basket of high-quality PSU bonds.

How Do ETFs Work?

Understanding the mechanics of an ETF helps you see why they are so efficient. The process involves a unique cycle of creation and redemption that keeps the ETF price close to its actual value (NAV).

Step 1: ETF Creation

The process starts with an Asset Management Company (AMC) creating an ETF scheme. Unlike regular funds where the AMC takes cash to buy stocks, here, Authorized Participants (APs)—usually large institutions—deposit the actual basket of securities (e.g., all 50 Nifty stocks) with the AMC. In return, the AMC issues “Creation Units” (large blocks of ETF units) to the AP.

Step 2: Listing on Exchange

The APs then list these ETF units on stock exchanges like NSE or BSE. This is where retail investors like you come in. You don’t deal with the AMC directly; you buy these units from the exchange just like you would buy shares of Reliance or Infosys.

Step 3: Intraday Trading

Once listed, ETFs trade freely. If the Nifty 50 goes up by 1%, the Nifty ETF price typically goes up by ~1%. You can place market orders, limit orders, or stop-loss orders. The price you pay is the Market Price, which is determined by buyer and seller demand.

Step 4: Tracking the Index

The ETF portfolio is passively managed. If the Nifty 50 index replaces a company (e.g., removing Stock A and adding Stock B), the ETF automatically does the same to ensure it mirrors the index perfectly.

Step 5: Redemption

Retail investors cannot redeem units with the AMC. To exit, you simply sell your units on the exchange to another buyer. Large APs, however, can redeem Creation Units with the AMC in exchange for the underlying securities.

NAV vs. Market Price:

• NAV (Net Asset Value): The actual fair value of the holdings.
• Market Price: The price you pay on the exchange. Ideally, these should be identical. If the Market Price drifts too far from the NAV, APs step in to profit from the difference (arbitrage), which brings the price back in line.

Types of ETFs

India’s ETF market has evolved significantly. Here are the main categories available for investment in FY 2025-26.

Equity ETFs

These track stock market indices. They are the most popular type of ETF in India.

• Broad Market: Track indices like Nifty 50 or Sensex. They provide instant diversification across large-cap companies.
• Examples: Nippon India ETF Nifty BeES, ICICI Prudential Nifty Next 50 ETF.
• Suitability: Ideal for long-term wealth creation with equity exposure.

Gold ETFs

Gold ETFs offer a way to invest in gold without worrying about purity, making charges, or locker fees. Each unit typically represents 0.01 grams or 1 gram of 99.5% pure physical gold.

• Mechanism: The AMC holds physical gold bars in a secure vault to back every unit sold.
• Examples: HDFC Gold ETF, Nippon India Gold BeES, SBI Gold ETF.
• Taxation Note: As per Finance Act 2024, listed Gold ETFs held for more than 12 months are taxed at 12.5% LTCG.

Debt ETFs (Bond ETFs)

These allow you to lend money to the government or corporations. They are generally safer than equity ETFs.

• Target Maturity Funds: These have a fixed maturity date (e.g., 2030). You can hold them till maturity to get predictable returns.
• Examples: Bharat Bond ETF (invests in PSU bonds), Nippon India ETF Long Term Gilt.
• Suitability: Conservative investors looking for better-than-FD returns with high safety.

International ETFs

These give you exposure to foreign markets, such as the US technology sector.

• Examples: Motilal Oswal Nasdaq 100 ETF (tracks US tech giants), Nippon India ETF Hang Seng BeES.
• Risk: Apart from market risk, you also face currency risk (Rupee vs. Dollar fluctuations).

Sector/Thematic ETFs

These focus on a specific industry.

• Examples: Nippon India ETF Nifty Bank BeES (Banking), ICICI Prudential Nifty IT ETF (Technology).
• Risk: Higher concentration risk. If the IT sector underperforms, your entire investment suffers.

Benefits of Investing in ETFs

Why are ETFs gaining popularity among Indian investors? The answer lies in efficiency and cost.

• Ultra-Low Expense Ratio: ETFs are passively managed, meaning no expensive fund manager salaries. Expense ratios can be as low as 0.05% to 0.25%. Compare this to active mutual funds, which often charge 1.5% to 2%. Over 20 years, this small difference can compound into lakhs of extra returns.
• Intraday Flexibility: Unlike mutual funds where you are stuck with the day’s closing price, ETFs let you buy or sell at 10:00 AM, 12:30 PM, or 3:29 PM. You can react to market news instantly.
• Transparency: You always know exactly what you own. An ETF’s portfolio is disclosed daily and matches the index. There is no “style drift” where a fund manager suddenly changes strategy.
• Diversification: With a single unit of Nifty BeES (approx. ₹297), you get exposure to India’s 50 largest companies. You don’t need ₹50,000 to buy individual shares of MRF or Page Industries.
• Liquidity: Popular ETFs have high trading volumes on NSE/BSE, ensuring you can enter or exit positions easily without significant price impact.

Risks of ETFs

While efficient, ETFs are not risk-free. You must be aware of these pitfalls:

• Tracking Error: Ideally, if the Nifty moves 1%, the ETF should move 1%. In reality, expenses and cash delays cause a slight difference, known as tracking error. Lower tracking error is better.
• Bid-Ask Spread: This is the difference between the buying price (Ask) and selling price (Bid). In illiquid ETFs, this spread can be wide (e.g., Buy at ₹101, Sell at ₹99), which eats into your returns immediately.
• Liquidity Risk: Not all ETFs are popular. Some niche sector ETFs trade very few units daily. If you buy a large quantity, you might struggle to sell them later at a fair price.
• Market Risk: An Equity ETF falls exactly as much as the market. If the market crashes 20%, your ETF will likely crash 20%. There is no fund manager to move to cash to protect the downside.
• No Automatic SIP: Most brokers do not offer a true “auto-debit” SIP for ETFs like they do for mutual funds. You often have to log in and place the buy order manually each month (though some brokers offer “SIP-like” tools).

How to Invest in ETF?

Investing in an ETF is as simple as buying a stock. Here is your roadmap:

Step 1: Open a Demat & Trading Account
Unlike mutual funds, you cannot invest in ETFs without a Demat account. You need a broker to facilitate the trade on the exchange.

• Action: Open your account with a trusted broker like PL Capital. Ensure your KYC (PAN + Aadhaar) is updated.

Step 2: Select the Right ETF
Don’t just buy any ETF. Filter by:

• Liquidity: Check the average daily volume. It should be at least 1-2 lakh units.
• Expense Ratio: Lower is better (e.g., <0.10% for Nifty ETFs).
• Tracking Error: Look for the lowest historical tracking error.

Step 3: Search the Ticker
Log into your trading app (e.g., PL Capital app) and search for the symbol.

• For Nifty 50: Search “NIFTYBEES” or “SETFNIF50”.
• For Gold: Search “GOLDBEES” or “HDFCMFGETF”.

Step 4: Check the Price
Look at the Market Depth (Bid/Ask). Ensure the gap between buy and sell orders is small (e.g., ₹0.05 to ₹0.10). If the gap is huge (e.g., ₹2.00), avoid that ETF.

Step 5: Place Your Order

• Limit Order (Recommended): Set a specific price you are willing to pay (e.g., ₹296.50). This protects you from sudden price spikes.
• Market Order: Buys immediately at the best available price. Use this only for highly liquid ETFs like Nifty BeES.

Step 6: Settlement
In India, stocks and ETFs follow a T+1 settlement cycle. If you buy on Monday, the units will appear in your Demat account by Tuesday evening.

Taxation of ETFs (FY 2025-26)

Taxation rules changed significantly with the Finance Act 2024. Here is the current structure effective November 2025:

*Note: Debt ETFs investing >65% in debt are classified as “Specified Mutual Funds” under Section 50AA and are taxed at slab rates regardless of holding period.

Conclusion

ETFs have democratized investing in India, allowing retail investors to buy a slice of the entire economy for less than ₹500. They offer a powerful combination of low costs, transparency, and flexibility that traditional mutual funds struggle to match. However, they require a Demat account and a bit more hands-on involvement to execute trades. Whether you are building a long-term retirement corpus or parking cash for the short term, there is likely an ETF that fits your needs.

Ready to start your low-cost investment journey? Open your PL Capital account today and access a wide range of ETFs with seamless execution.

FAQs on ETFs

1. What is ETF and how does it differ from a Mutual Fund?

An ETF (Exchange Traded Fund) is a basket of securities that trades on the stock exchange like a share. The key difference is that ETFs trade in real-time at fluctuating market prices, whereas mutual funds trade only once a day at the closing NAV. ETFs also typically have lower expense ratios.

2. Is ETF a good investment for beginners?

Yes, broad market ETFs (like Nifty 50) are excellent for beginners. They eliminate the risk of picking the “wrong” stock by diversifying across the top 50 companies. The low cost and transparency make them a safe entry point into equity markets, provided you have a long-term horizon.

3. Which ETF is best for long-term wealth creation in India?

For long-term equity exposure, Nifty 50 ETFs (like Nippon India Nifty BeES or SBI Nifty 50 ETF) are highly recommended. They track the benchmark index, offer high liquidity, and have very low expense ratios (often under 0.10%), ensuring your returns aren’t eaten up by fees.

4. How are Gold ETFs taxed in FY 2025-26?

As per the Finance Act 2024, listed Gold ETFs held for more than 12 months are taxed at 12.5% (Long Term Capital Gains) without indexation benefits. If sold within 12 months, the gains are added to your income and taxed at your applicable slab rate (Short Term Capital Gains).

5. Can I do an SIP in ETFs?

Technically, ETFs do not have a built-in SIP mechanism like mutual funds because they trade on the exchange. However, you can manually buy a fixed number of units every month, or use “SIP-style” tools offered by brokers like PL Capital that automatically place buy orders for you on set dates.

Investment in securities market are subject to market risks. Read all the related documents carefully before investing. The information provided is for educational purposes and should not be construed as investment advice. Tax rates are based on Finance Act 2024/2025 and subject to change.