Exchange Traded Funds (ETFs): A Brief Introduction

While investing in mutual funds, you might have come across the term ETF. The full form of ETF is Exchange Traded Funds. In India, Exchange Traded Funds came into existence in the year 2001. The first Exchange Traded Fund was NIFTY BeES (NIFTY Benchmark Exchange Traded Scheme), which has NIFTY 50 as its underlying index. 

What are Exchange Traded Funds?

An exchange-traded fund, which is commonly known as an ETF, is a type of passively managed mutual fund. The aim of the fund manager of an ETF is to replicate the portfolio and performance of a publicly available index. These funds generally track indexes like BSE Sensex or NSE Nifty. ETFs are actually index funds whose units can be traded like stocks on the stock exchange.

The price of ETF units reflects the net asset value of stocks in which the ETF has invested. One of the basic differences between other types of index funds is that ETF units can be traded just like shares in the stock market. 

List of NSE ETFs in India

Let us take a look at the list of Exchange Traded Funds listed on the National Stock Exchange: 

*Data valid as of May 2, 2023. 

How to Invest in an ETF? 

Here are the steps that you can follow if you wish to invest in Exchange Traded Funds:

Step 1: To start investing in ETFs, you need to have a trading account along with a Demat account with a stockbroker. Register yourself on a brokerage platform and set up your account after KYC verification. 

Step 2: Once you have set up these, you need to choose an ETF which aligns with your investment goals.

Step 3: After deciding which ETF you want to invest in, you can buy the units of the ETF during market hours. Simply place a buy order, like shares, on the brokerage platform, and once the order is confirmed, the ETF units will be delivered to your Demat account. 

Best ETFs in India 

Following is a list of the best ETFs in India on the basis of their annualised returns*:

*Data valid as of May 2, 2023. 

What is Gold Exchange Traded Fund in India?

A gold ETF is a type of Exchange Traded Fund that aims to track the price of domestic physical gold. These are commodity-based mutual funds that invest in gold bullion and let you invest in gold in a paper or dematerialised form. 

Gold ETFs are passive investment instruments and combine the flexibility of stock investment and the simplicity of gold investment. One unit of gold ETF is equal to 1 gram of gold. Gold ETFs have the backing of physical gold, which is of very high purity. 

If you invest in a gold ETF, it is like purchasing gold but in physical form. You can buy and sell gold ETF units just like shares. If you decide to redeem gold ETF units, you can also receive cash equivalent to your investment based on the creation size unit redeemed. 

Final Word

Now that you are aware of what Exchange Traded Funds are, you might choose the best one for yourself and start investing. You can choose an ETF suitable for investing by checking its category, expense ratio, tracking error and trading volume. 

Frequently Asked Questions

What is an exchange-traded fund with an example?

Ans. The exchange-traded fund is a basket that holds various types of stocks; these are passively managed with the aim of replicating the returns of an underlying index. Some examples of ETFs in India are Motilal Oswal NASDAQ 100 ETF, SBI ETF Sensex and Aditya Birla Sun Life Gold ETF.

What is the difference between an ETF and a mutual fund? 

Ans. The basic differences between ETFs and mutual funds are that ETF units are traded like stocks throughout the day while you can purchase mutual funds at the end of the day after the calculation of NAV. 

While mutual funds are actively managed by portfolio managers, ETFs are passively managed with the aim of replicating the returns of a particular index. In comparison to mutual funds, ETFs charge lower annual fees.

Which is the best ETF in India? 

Ans. The choice of the best ETF in India for a person is subjective in nature. Factors like trading cost, liquidity, expense ratio and tracking error determine which exchange-traded fund suits you. However, you have to analyse your risk profile and your investment plans thoroughly before investing.

Are ETFs a good investment? 

Ans. ETFs might be a good investment if you are planning to diversify your portfolio immediately. They are comparatively cheaper than mutual funds and might be a great choice for new investors. However, you need to keep in mind that ETFs cost more than stocks. They also offer less control over taxable income and do not hedge from volatility. Therefore, it is up to the investor to decide whether it is actually a good investment option or not.

How to start an exchange traded fund?

Ans. The process to start an exchange-traded fund is quite similar to starting an open-ended mutual fund. As the ETF’s fund manager, you need to sponsor, design, develop and finally launch the fund on behalf of the AMC. The manager needs to submit a detailed plan for the fund for its approval. Once it is created, the manager needs to buy and deposit all the assets that are listed in the ETF.