ETF
An Exchange Traded Fund (ETF) is a basket of securities that tracks an index or asset class and is listed and traded on a stock exchange like NSE or BSE, just like individual shares, allowing investors to buy and sell units throughout the trading day at market prices.
An Exchange Traded Fund (ETF) combines features of both mutual funds and stocks. Like a mutual fund, it holds a diversified portfolio of securities — equities, bonds, gold, or other assets. Like a stock, its units trade on an exchange throughout the day at market-determined prices, meaning the price fluctuates in real time rather than being calculated once at day-end like a mutual fund NAV.
In India, equity ETFs typically track indices like Nifty 50, Sensex, Nifty Next 50, or sectoral indices. Gold ETFs hold physical gold and are the most popular non-equity ETF category in India, with cumulative AUM exceeding Rs 35,000 crore. EPFO (Employees' Provident Fund Organisation), the world's largest retirement fund investor in ETFs by unit count, has been a significant driver of Nifty 50 and Sensex ETF volumes in India.
ETFs offer two key advantages over regular index mutual funds: intraday liquidity and typically the lowest expense ratios available. The TER of large-cap ETFs in India is often as low as 0.05-0.10%, compared to 0.10-0.20% for the equivalent index fund. However, ETFs also have a cost unique to listed products — the bid-ask spread. When buying an ETF, an investor pays the ask price; when selling, they receive the bid price. For illiquid ETFs with low trading volumes, this spread can be wider than the expense ratio savings, making them less cost-effective in practice.
Another consideration is that ETF investors need a demat account, while index fund investors do not. For investors without a demat account or those making regular SIPs, index funds are simpler and practically equivalent in cost for most large-cap products. ETFs are better suited for investors making lump-sum investments in highly liquid products like Nifty Bees or Nifty 50 ETFs with high daily trading volumes.
A misconception about ETFs is that they always track their NAV perfectly. In reality, ETF market prices can trade at a premium or discount to the actual NAV of the underlying portfolio. This divergence is typically small for liquid ETFs but can be significant for illiquid sectoral or thematic ETFs. Market makers and authorised participants arbitrage away large premiums and discounts, but this mechanism works imperfectly during volatile market conditions.