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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
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By

Kylie Purcell

Updated

Fact checked

What is an ETF?

An exchange-traded fund (ETF) is where you own a bundle of shares or options in a single trade that is listed on a stock exchange such as the National Stock Exchange of India (NSE) and the BSE (formerly known as the Bombay Stock Exchange).

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. 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.

How to buy ETFs in India

To start investing in ETFs you buy ETF units, which are similar to company shares. ETF units can be ought the same way that you do shares, through a broker or online share trading platform.

After you’ve signed up to a brokerage and decided which ETF to buy, you can search for the name or ticker code of the ETF. You’ll soon notice that each ETF has a price. This is called the unit price.

6 steps to buying an ETF
  1. Compare online share trading platform
  2. Sign up for 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 name or ticker code of the ETF you want and place an order
  5. Check the ETF unit price and make sure you’re happy with it
  6. Track the performance of your ETF

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.

Updated regularly
Name Product Number of stocks CFDs Shares Available Markets Link
Libertex
Libertex
50+
Yes
Yes
US
Go to site
CFD service. Your capital is at risk.
CFD Service. Your capital is at risk.
Pay $0 fee on every trade in the stock market by opening a Libertex investment account. Start investing with just $50 and earn dividends from your stocks on the Libertex Portfolio platform.
ICICI Direct
ICICI Direct
All NSE/BSE listed stocks
No
Yes
US, UK, HK, SG, JP, DE, IN
Go to site
More info
Kickstart your investment journey with one of the largest retail stock brokers in India. Open a single 3-in-1 integrated account and trade a wide range of asset classes with ease.
Saxo Bank
Saxo Bank
19,000+
Yes
Yes
US, CA, ES, NL, IE, UK, IT, DK, FI, SE, BG, PT, FR, CZ, CH, AT, PL, ZA, AU, HK, MY, HK-CH, SG, JP, MX, DE, NO, RU
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, CA, ES, NL, UK, IT, SE, BG, FR, CH, AT, AU, HK, SG, JP
Go to site
More info
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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Example: Buying an ETF

Say you want to invest INR 1,000 into your ETF of choice and the ETF unit price is INR 1. The brokerage service you use also charges INR 10 each time you place a trade (leaving you with INR 990 to invest). Excluding the brokerage fee, you would buy 990 ETF units at INR 1 each.

Before you buy, it’s a good idea to compare the ETF unit price with its iNAV price (available from the ETF issuer). The iNAV price tells you how much the price of the ETF should be relative to the assets it holds. When there’s a lot of volatility in the market, sometimes these 2 prices can be very different. If the ETF unit price is higher than the iNAV price, then you’re probably paying more than what the ETF’s true value is.

For this reason, it’s a good idea to set a “limit order” based on the iNAV price when you’re buying ETF units. A limit order allows you to select the price that you’d like to buy the ETF at. Once the ETF falls to that price, your order will go through.

Pro and cons of ETFs

Pros

  • Index fund investing. Index funds have become a popular way to invest relatively safely in the stock market. Most (not all) ETFs are types of index funds.
  • Diversify your portfolio. Buying units in just 1 ETF allows you to invest in many shares and asset classes at once.
  • Dividend income. If the underlying assets held by an ETF pay dividends, those dividends and franking credits (if applicable) will be passed on to you.
  • Relatively inexpensive. Creating a diversified portfolio of shares and other investment options usually requires a lot of money. But if you invest in ETFs in India, 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.
  • Easy exit. Unlike some other types of investments that lock you into a contract for a fixed term, ETFs are open-ended meaning they are easy to transact with.

Cons

  • 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, depending on what they are tracking.
  • 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.

Types of ETFs

The humble ETF has evolved starting out as a simple passive investing index. Nowadays you can get an ETF for pretty much anything ranging from your more traditional passive approach, to an active strategy, thematic strategy and everything in between.

Here are the different ETF types you might want to trade in India:

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 S&P 500 (US stock market).

Active ETFs

Also referred to as exchange traded managed funds (ETMFs), active ETFs aim to outperform the market or a particular index. These sometimes come with a higher level of risk and usually have higher management fees.

Factor and Smart Beta ETFs

These combine 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.

Structured and synthetic ETFs

Synthetic ETFs are where this starts getting a little bit more complex.

ETFs access investment assets in 2 ways: physically or synthetically. ETF issuers of a physical (or standard) ETF have purchased the underlying assets on the index it aims to replicate.

On the other hand, structured or synthetic ETFs try to replicate the performance of their 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 due to storing large amounts of gold is often difficult. Instead of investing in an actual lump of gold, 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.

Commodity ETFs

Commodity ETFs, or exchange traded commodities (ETCs), track the performance of an underlying physical commodity, such as gold, natural resources or agricultural products.

What are the costs of investing in ETFs?

When you invest in an ETF in India, 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. While ETFs typically charge lower fees than unlisted managed funds, this isn’t always the case.

You should always read the description 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. The wider the spread, the more it can cost you.

Do ETFs pay dividends?

Some ETFs in India 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. This information should be available in the ETFs product disclosure statement.

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.

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). By comparing it with the buy and sell (unit) prices quoted by your ETF broker, you can determine whether you will get value for money.
  • 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 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 different themes. Some ETFs track large stocks from the US while others track 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 they track. 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 200 stocks.

Frequently asked questions

Important information: Powered by finder.com. This information is general in nature and is no substitute for professional advice. It does not take into account your personal situation. 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 most investors. You do not own or have any interest in the underlying asset. Capital is at risk, including the risk of losing more than the amount originally put in, market volatility and liquidity risks. Past performance is no guarantee of future results. Tax on profits may apply. Consider your own circumstances, including whether you can afford to take the high risk of losing your money and possess the relevant experience and knowledge. We recommend that you obtain independent advice from a suitably licensed financial advisor before making any trades.

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