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A beginner’s guide to exchange traded funds (ETFs) in India

How to invest in exchange traded funds in India – the benefits, the risks and how to get started.

Invest in ETFs through a broker Compare online brokers

How to buy ETFs in 5 steps (2021 update)

  1. Compare and find the best online share trading platform for you
  2. Sign up for a demat and a trading account. You’ll need to provide personal details and proof of ID
  3. Transfer money into your trading account
  4. Search for the ETF you want and place a buy order
  5. Track the performance of your ETF
Exchange traded funds (ETFs) are investment funds made up of multiple shares or other assets that can be bought and sold on a stock exchange. This means that you invest in them through a share trading platform, the same way you would buy stocks.

ETFs have become popular in the last few years in India thanks to the rise of index fund investing and because you can invest in multiple shares in one trade. But how do they work, are they safe and how do you invest in them? Our guide covers everything you need to know about ETF investing.

Compare online ETF brokers

ETFs are bought and sold just like regular stocks, so you’ll need to choose an online broker before you are able to invest.

Name Product Number of stocks CFDs Shares Available Markets Link
Axis Direct
All NSE/BSE listed stocks
No
Yes
IN
Go to site
More info
Get brokerage cashback of up to Rs 500 on trades done online through Axis Direct website, Swift Trade, or Mobile app. Grow your investment portfolio and maximise your gains with AxisDirect’s 3-in-1 demat, trading and savings account.
TradeSmart
All NSE/BSE listed stocks
No
Yes
IN
Go to site
More info
CFD Service. Your capital is at risk.
Achieve your financial objectives and trade various financial instruments with India’s leading discount broker.
Saxo Bank
19,000+
Yes
Yes
AU, CN, CZ, DK, ES, FR, TW, HK, IT, HU, SA, NE, NO, PL, RU, SG, CH, UK, JP
Go to site
CFD service. Your capital is at risk.
More info
CFD Service. Your capital is at risk.
Trade 40,000+ financial instruments at market-leading prices with this powerful yet intuitive trading platform.
Zacks Trade
Zacks Trade
Access to global markets
No
Yes
US, AU, ES, FR, HK, IT, NO, RU, SG, CH, UK, JP, MX, DE, CA, AUT, BEL, NL, SE
Go to site
CFD Service. Your capital is at risk.
Trade stocks, bonds, ETFs, options, and more on 90+ international exchanges. Offers customisable trading platforms with over 120 technical indicators for your charting needs.
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What is an ETF?

An ETF is a low-cost investment fund that can be traded on a stock exchange such as the National Stock Exchange of India (NSE) and the BSE (formerly known as the Bombay Stock Exchange). These funds are created by ETF issuers and fund managers and are made up of a basket of securities such as shares, cash and bonds.

Each ETF is allocated an Indian stock exchange code and can be bought and sold by investors the same way that you would buy and sell shares. By investing in ETFs, you can easily create a diversified portfolio and spread your investment across a wide range of asset classes, including Indian shares, global shares, fixed income, debt, foreign currencies, commodities and metals.

Types of ETFs

An exchange trade fund is a basket of securities that has been listed on the Indian stock exchanges by ETF issuers and fund managers. While standard ETFs typically track an index, others are actively managed or use derivative products to influence the fund’s performance. Put simply, an ETF is a fund of securities that can be traded on a stock exchange.

What is an index fund?

Index funds track a selection of stocks that make up an index. For example, the Nifty 50 is an index consisted of the largest 50 companies on the NSE, while S&P500 and Nasdaq are indices comprised of some of the world’s biggest companies. An index fund will try to match the returns of its underlying index.

Index funds vs active funds

ETFs have built a reputation for being low-risk and for delivering decent returns over a long period of time. That’s mostly true for index fund ETFs, but listed funds today come in many shapes and sizes, and some of them carry as much risk as any stock on the NSE or the BSE.

To make matters more confusing, the terms are frequently muddled between fund managers and investors. As a way to avoid confusion, securities authorities in some part of the world have broadly labelled them all “exchange traded products” (ETPs) and subcategorised them into “ETFs” (index funds), exchange traded managed funds (ETMFs) and synthetic funds or structured funds.

Despite their efforts, you’ll find they’re mostly just referred to as “ETFs” by investors and analysts.

  • Passive ETFs. Also known as indexed ETFs or index funds. These funds aim to replicate the returns of a specific index or benchmark. For example, you may want to invest in a fund that tracks the performance of the Nifty 50 or the S&P 500.
  • Active ETFs. Also referred to as exchange traded managed funds (ETMFs). Active ETFs aim to outperform the market or a particular index to generate higher returns. These sometimes come with a higher level of risk and usually have higher management fees.
  • Factor and Smart Beta ETFs. Combines both active and passive strategies. They typically track an index but factor in additional variables, such as a higher weighting of smaller companies. Smart Beta ETFs track non-traditional indices designed to invest in a selection of company stocks based on their own set of rules. The idea is to outperform the market.

On the outside, these can appear to be very similar. However, they’re quite different in nature in terms of strategy and level of risk.

What are structured or synthetic ETFs?

ETFs access investment assets in two ways: physically or synthetically. ETF issuers of a physical (or standard) ETF have purchased the underlying asset on the index it aims to replicate. When you invest in an ETF, it doesn’t mean you own the assets yourself; instead, you own shares in the ETF that holds the assets.

On the other hand, structured or synthetic ETFs try to replicate the performance of its underlying assets through the use of derivatives. This is because it’s not always practical to hold physical assets. For example, gold or commodity ETFs are often synthetic. This means that when you invest in one, you’re not actually buying a lump of gold; rather, you’re investing in a contract that promises returns based on the commodity’s price movements.

What is a derivative?

Derivatives are products that derive their value from underlying assets like commodities or shares. Instead of purchasing a physical asset, it is a contract with an agreed upon return based on the price of the movements of the underlying asset.

Warning: Because structured products may use complex investment strategies, they can be much riskier than a standard index ETF.

What are ETMFs?

Active ETFs or ETMFs are actively managed listed funds. Fund managers aim to outperform the market by manoeuvring securities and sometimes derivative products within the fund. As such, they may carry higher risk than passive index funds and usually charge higher fees for the service.

What are commodity ETFs?

Commodity ETFs, or exchange traded commodities (ETCs), track the performance of an underlying physical commodity, such as gold, natural resources and agricultural products. Instead of investing in the actual commodity, the ETF will typically track the price movements of the commodity or its index. Because of this, commodity ETFs are typically synthetic or structured products.

What are the costs of investing in ETFs?

When you invest in an ETF, the first cost you’ll be aware of is the ETF unit price; however, there are other less obvious costs you need to be aware of, such as the management fees. While ETFs typically charge lower fees than unlisted managed funds, this isn’t always the case.

You should always read the Scheme Information Document (SID) provided by the ETF issuer for full details of any fees that apply and how they will affect your investments. Here are the main costs to take note of:

  • Management fees. Just like any other managed fund, ETFs have management fees, which are sometimes referred to as the management expense ratio (MER). This fee is charged by the ETF issuer and is usually included in the unit price.
  • Brokerage fees. You’ll need to pay brokerage fees whenever you buy or sell ETF units. These fees vary depending on the online broker you choose and can range from ₹0 to ₹30 per trade.
  • The buy/sell spread. This is the difference between the highest price you’re willing to pay for an ETF unit and the lowest price at which a seller is happy to sell.

Do ETFs pay dividends?

Some ETFs pay dividends if the underlying company stocks pay dividends. However it also depends on whether the fund manager chooses to pass this on, so check this first if this is a priority.

Most of the time ETFs will pay their dividends on a quarterly basis, though this isn’t a rule. If you’re interested in ETF dividends, check the yield, how often it’s paid, and whether you can reinvest the payments back into the ETF if you choose or if it’s paid into your account. Yield is the percentage of the amount you’ve invested which is paid to you as dividend income.

How do I compare ETFs?

Like share prices, the price of ETF units can fluctuate day-to-day. However, many ETFs move up and down in line with the index they are tracking, so there are a few simple tips to keep in mind to help you get more out of your ETF investments:

  • Compare the price. ETF issuers regularly provide net asset value (NAV) information, often in real time. This is commonly referred to as the indicative NAV (or iNAV), and by comparing it with the buy and sell prices quoted by your ETF broker, you can determine whether you will get value for money when buying or selling units in an ETF.
  • Consider limit orders. The iNAV can change quite quickly throughout the day, as volatility in underlying markets drives it up or down. If you’re investing in a volatile ETF, such as an exchange traded commodity (ETC), it may be safer to place limit orders rather than market orders when buying or selling, which will ensure that you get the price you want.
  • Management fees. All ETFs charge management (MER) fees which is taken as a percentage of your returns. The expense ratio of an ETF in India is usually less than 0.5%, so make sure the fees match your returns.
  • Markets and sectors. ETFs have all different themes. Some ETFs track large stocks from the US, others small-cap stocks from India or specific sectors such as health, tech or renewables.
  • Choose carefully. ETFs come in all shapes and sizes and carry different levels of risks depending on the type of assets it tracks. For example, while an ETF focused on resource stocks might offer the potential for higher returns, it also comes with a higher risk attached than an index that tracks the top 50 stocks.

What are the benefits of investing in ETFs?

There are many reasons to consider investing in ETFs:

  • Diversify your portfolio. Buying units in just one ETF allows you to invest in many shares and asset classes at once. By spreading your money across asset classes, you can minimise your level of risk.
  • Dividend income. If the underlying assets held by an ETF pay dividends, those dividends will be passed on to you.
  • Easy to access. Rather than researching and then selecting a broad range of investments, the ETF issuer does all the hard work of choosing investments for you; all you have to do is choose the ETFs and purchase the units via a broker or online share trading platform.
  • Relatively inexpensive. Creating a diversified portfolio through shares and other traditional investment options usually requires a significant amount of capital. But if you invest in ETFs, you can get started with as little as a few hundred rupees at a time or less if you use an investment platform such as Groww or Zerodha Coin.
  • Tax-effective investment. Because most ETFs attempt to track the performance of a specific index, there is usually a low turnover of investments when compared to actively managed funds. This results in fewer tax liabilities on capital gains for investors.
  • Easy exit. Unlike some other types of investments that lock you into a contract for a fixed term, ETFs are open-ended. This means that as long as there is sufficient liquidity available, you can buy and sell ETFs whenever you choose. For example, if you need fast access to your funds or an emergency or opportunity, you can quickly liquidate your ETF holding.

What are the risks of investing in ETFs?

ETFs are often advertised as being a safer investment than directly buying shares on the stock market, but this is not always the case. Although many ETFs are relatively safe index funds that track major indices, it’s also possible for an index fund to track a volatile global market, such as rare earth metals or the oil market.

You should also remember that technically any kind of asset can be bundled into a fund as well as risky derivative-type products. This means that not all ETFs are passive index funds as you may believe. Always do your research before you invest. Here are some of the main risks to consider:

  • Losing money. If the underlying assets owned by an ETF don’t perform as hoped, the value of an ETF will fall – and the value of ETF units you own will fall along with it.
  • Tracking errors. As we mentioned above, ETFs don’t always exactly mimic the performance of the index they’re designed to track, with fees, taxes and other factors potentially resulting in lower-than-expected returns.
  • Risks associated with individual ETFs. The underlying assets held by your ETF also come with their own risks. For example, if your ETF exposes you to investments that may be difficult to sell in certain market circumstances, such as commodities or emerging global markets, you’ll need to accept an increased level of risk.
  • International taxes. If you buy units in an ETF that is listed in a country other than India, you may need to pay foreign taxes. Make sure you’re aware of all tax implications of an ETF before you commit any funds.

Synthetic ETFs have all the same risks as physical ETFs, but they also expose you to a few additional potential problems:

  • Counterparty risks. Synthetic ETFs take out contracts with third parties, which are usually investment banks. If these third parties are financially unable to fulfil any commitments they make to the ETF, such as paying the return on the underlying index to the ETF, the performance of your investment will suffer.
  • Commodities risks. Most ETFs that track the performance of commodities are synthetic ETFs that track the futures price of a commodity or index. However, in some circumstances, the price of futures differs from the price of the actual commodity, so it’s essential to be aware of whether a fund tracks current or futures commodity prices before you buy.

Before deciding whether ETFs are the best investment solution for you, make sure you’re fully aware of how they work and have an in-depth understanding of all the risks involved. Read the SID closely, ask questions of the ETF issuer if you’re unsure about anything and consider seeking help from a qualified financial adviser.

Trade ETFs via CFDs

It’s also possible to trade CFDs with ETFs as the underlying asset. CFDs are contracts for difference, which allow traders to speculate on the value of financial products without owning the underlying asset. For example, traders can purchase a CFD with an ETF as the underlying asset, and speculate if you think the ETF will rise (go long) or fall (go short) in value.

CFDs are leveraged products, meaning that the potential returns on your investment are magnified; however, so are your potential losses, and you can lose more than your initial deposit.

Exchange Traded Funds (ETFs) frequently asked questions

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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