What is an ETF? Simple Guide for Indian Investors (2025)

What is an ETF?

ETF = Exchange Traded Fund

Exchange Traded

• You buy and sell it on NSE/BSE through your demat account.
• Price changes throughout the day.

Fund

It holds a basket of assets — usually stocks, bonds, or gold.

Example:

A Nifty 50 ETF holds all 50 Nifty companies (Reliance, TCS, Infosys, HDFC Bank, etc.).

One unit gives you exposure to the entire index in one shot.

This is instant diversification.

How ETFs Work

Here's a simple breakdown using Nippon India Nifty 50 BeES:

1. The fund house buys all 50 Nifty stocks in the same proportion as the index.
2. They package these into ETF units.
3. These units are listed on NSE/BSE.
4. You buy them like a stock using Zerodha, Groww, etc.
5. The price moves with the Nifty 50 index.
6. You sell your units on the exchange whenever you want.

That's it — you get market exposure without buying 50 different stocks.

ETF vs Mutual Fund: Key Differences

Trading

• ETF: Buy/sell anytime during market hours.
• Mutual Fund: Buy/sell only at end-of-day NAV.

Fees

• ETF: Very low expense ratio (0.05%–0.50%).
• Mutual Fund: Higher fees (0.25%–2.5%).

Management

• ETF: Passive (tracks an index).
• Mutual Fund: Active or passive.

Transparency

• ETF: Daily holdings.
• Mutual Fund: Monthly holdings.

Minimum Investment

• ETF: Just 1 unit (often ₹100–₹200).
• Mutual Fund: ₹500–₹5,000 SIP minimums.

Neither is "better." They serve different needs depending on your investing style.

Types of ETFs in India

Equity ETFs

Track stock indices like:

• Nifty 50
• Sensex
• Nifty Next 50
• Bank Nifty

Debt ETFs

Track government or corporate bonds:

• Gilt ETFs
• Corporate bond ETFs

Gold ETFs

Track gold price. Each unit ≈ 1 gram of digital gold.

Sector ETFs

Focus on specific industries:

• IT
• Pharma
• PSU Banks
• Infrastructure

International ETFs

Give exposure to foreign markets:

• NASDAQ 100
• US market ETFs

Most beginners only need broad equity index ETFs.

Pros and Cons of ETFs

Pros

• Low expense ratio
• High transparency
• Instant diversification
• Intraday liquidity
• No lock-in

Cons

• Requires a demat account
• Brokerage charges apply
• Some ETFs have low liquidity
• Tracking error reduces accuracy
• No automatic SIP option

Is an ETF Good for Beginners?

ETFs make sense if you:

• Want low-cost passive investing
• Don't mind manual monthly investing
• Prefer real-time liquidity
• Are comfortable using a demat account

ETFs may NOT make sense if you:

• Don't have a demat account
• Want automatic monthly SIPs
• Invest extremely small amounts
• Prefer active fund management

Honest take:

For absolute beginners, index mutual funds are simpler. Once comfortable, ETFs offer better cost-efficiency.

Risks & Misconceptions

Tracking Error

ETF returns may differ slightly from the index due to:

• Fund expenses
• Rebalancing
• Cash management

Liquidity Issues

Some ETFs trade at very low volumes. This can cause:

• Difficulty exiting
• Price deviation from NAV

NAV vs Market Price

ETFs have two prices:

• NAV: Actual value of assets
• Market Price: What people pay on the exchange

Small differences are normal.

"ETFs are safer than stocks" (Wrong)

If Nifty falls 10%, a Nifty ETF also falls ~10%. ETFs reduce company-specific risk, not market risk.

Bottom Line

An ETF is a simple, low-cost way to invest in a diversified basket of assets through one single trade.

If you want transparent, low-fee market exposure → ETFs work.

If you want automation (SIPs) → Index mutual funds are easier.

Choose based on your comfort, not hype.