What is an ETF in India? Structure, Types & Benefits Explained

How is an ETF structured?

An Exchange-Traded Fund (ETF) in the Indian stock market is structured as a pooled investment vehicle that holds a basket of securities such as stocks, bonds, or commodities.
It is designed to track the performance of a specific index, sector, or asset class.
ETFs are managed by Asset Management Companies (AMCs) and are regulated by the Securities and Exchange Board of India (SEBI).

An ETF is structured as an open-ended mutual fund scheme but trades on stock exchanges like shares.
It consists of two primary market participants: the Asset Management Company (AMC), which creates and manages the ETF, and Authorized Participants (APs) or market makers, who facilitate liquidity by creating and redeeming ETF units in large blocks called "creation units."

ETF units are created and redeemed based on an in-kind mechanism, where a basket of underlying securities is exchanged instead of cash.
This ensures that the ETF's price closely tracks the Net Asset Value (NAV) of its underlying assets.
Retail investors can buy and sell ETF units on stock exchanges through brokers, just like regular stocks, at market prices that may include a small premium or discount to the NAV.

There are different types of ETFs available in India, such as equity ETFs (tracking indices like Nifty 50, Sensex, or sectoral indices), debt ETFs (investing in government or corporate bonds), commodity ETFs (such as Gold ETFs), and international ETFs (providing exposure to global markets).

ETFs offer benefits like diversification, liquidity, cost-effectiveness, and transparency.
Since they are passively managed, they generally have lower expense ratios compared to actively managed mutual funds.
However, they are subject to market risks, tracking errors, and liquidity concerns, especially in less popular ETFs.

In India, ETFs have gained popularity due to regulatory initiatives such as the Employees’ Provident Fund Organization (EPFO) investing in ETFs and the launch of Bharat Bond ETFs to promote retail participation in the debt market.
Investors must have a demat account and a trading account to invest in ETFs.

    • Related Articles

    • How do I decide which ETF to invest in?

      Choosing the right Exchange-Traded Fund (ETF) requires a structured approach based on financial goals, risk tolerance, and market conditions. Here are the key factors to consider: 1. Investment Objective For broad market exposure, Index ETFs (e.g., ...

    • How does liquidity affect ETF trading?

      The liquidity of an ETF, which refers to how easily shares can be bought and sold without causing substantial price fluctuations, plays a vital role in facilitating efficient trading. This factor directly affects transaction costs and determines how ...

    • What is an Exchange-Traded Fund (ETF)?

      An Exchange-Traded Fund (ETF) is a type of investment fund that combines features of both mutual funds and stocks. Here's how it works: Like a mutual fund, an ETF pools money from many investors to invest in a collection of assets - such as stocks, ...

    • How does an ETF track an index?

      An Exchange-Traded Fund (ETF) is a type of investment fund that aims to replicate the performance of a specific market index, such as the Nifty 50 or Sensex. In India, ETFs are regulated by the Securities and Exchange Board of India (SEBI) and are ...

    • What is an ETF’s Net Asset Value (NAV)?

      An Exchange-Traded Fund (ETF) has a Net Asset Value (NAV), which represents the total value of its assets minus liabilities, divided by the number of outstanding units. NAV is calculated at the end of each trading day and helps investors understand ...