Investing With ETF In India: What You Need To Know (2024)

Exchange Traded Funds or ETFs have become investment products of choice for millions worldwide as well as in India in the last few years. The ETF market in India is worth more than ₹5 Lakh crores at present and is growing at a rapid speed. If you are looking for flexibility like stock trading and diversification like mutual funds, ETFs are great options.

In this guide on ETF investing, we will take an extensive look at the world of ETFs and guide you on how to begin investing with ETFs.

Understanding the Basics of ETFs

An Exchange Traded Fund (ETF) is an investment pool comprised of funds invested by various investors. The fund, in turn, is invested in a basket of assets such as stocks, commodities, currencies, bonds, and others. ETFs are traded on stock exchanges similar to listed stocks. They can be bought and sold anytime during a trading day.

Each ETF is designed to track a specific index, sector, or asset class, and hence follow an inherent theme. Thus diversification is an inherent benefit of investing with ETF. By investing in one ETF, an investor can gain exposure to multiple asset classes or sectors. ETFs are one of the most convenient and cost-effective ways to diversify your portfolio. UTI Nifty 50 ETF, Kotak PSU Bank ETF and HDFC Gold Exchange Traded Fund are some of the common examples of ETFs in India.

How do ETFs Work?

ETFs are designed by the fund provider with a theme in mind, such as to track a particular index. For example, UTI Nifty 50 ETF has been designed to track the Nifty 50 index, while the Kotak PSU Bank ETF tracks the Nifty PSU Bank index. Each ETF is managed by a professional and experienced portfolio manager.

ETF Prices are determined by the net asset value (NAV) of all their underlying assets. ETFs are traded on a stock exchange and can be bought and sold anytime during the trading day. The price of an ETF is determined by market forces, such as demand and supply.

While investing with an ETF, you buy a portion of the fund and become a shareholder in the fund, similar to buying the stock of a company. However, you do not become the owner of any of the underlying assets. So how do you make money by investing in ETFs? Well, in two ways: firstly, by capital gains from underlying assets and secondly, by dividends or interest income generated by the underlying assets.

A wide range of ETFs are traded on the stock exchanges in India. You can explore all these ETFs in the StockEdge App, the premium investment research app in India. Simply log in to the app and go to the mutual fund section of the app to search for ETFs and you will find a list of all the ETFs traded in India.

A screenshot of ETFs listed on the StockEdge App

Types of ETFs for Beginners to Consider

ETFs can be of various types based on the underlying components. Here’s a brief description of the best ETFs that a beginner can take a look at:

Index ETFs

Index ETFs are passive funds designed to track a particular benchmark index such as the Nifty 50. UTI S&P BSE Sensex ETF, ICICI Pru S&P BSE 500 ETF, and HDFC Nifty 50 ETF are a few examples of index ETFs traded in India.

Investors can benefit from capital gains when the underlying particular index performs well. For a passive investor interested in investing in the market as a whole, rather than individual stocks, index funds are an ideal option. They are also cost-effective avenues due to their low expense ratio.

Gold ETFs

One of the most popular ETFs, gold ETFs allow investors to gain exposure to the price of gold, the safe haven asset. By investing in gold ETFs, investors can participate in the rise and fall of gold prices in the global markets without the hassle of owning and storing physical gold. While exchange-traded funds gold are backed by physical gold, they are easier to buy and trade as compared to physical gold. They are excellent tools to hedge against inflation and currency fluctuations.

IDBI Gold Exchange Traded Fund, UTI Gold Exchange Traded Fund, HDFC Gold Exchange Traded Fund, and SBI – ETF Gold are some of the popular gold ETFs traded in India’s stock exchanges.

A screenshot of the StockEdge App showing the major Gold ETFs available in India

Industry/Sector ETFs

Industry/Sector ETFs are focused on specific sectors such as banking, healthcare, technology or others. These funds help investors gain exposure to companies in a particular industry. Some examples include Nippon ETF Infra BeES, Kotak PSU Bank ETF, Edelweiss ETS – Banking and SBI – ETF Nifty Bank.

Instead of investing in one single company investing with ETF that invest in a particular industry or sector could a great choice sometimes. Industry/sector ETFs help you gain exposure to multiple companies, thus reducing the overall risk of your portfolio. This also enables you to diversify. You can benefit from capital gains if the sector performs well on the whole.

To find out which sectors are most likely to perform in the market, you can use the sector rotation feature. You may read on of our previous blog Beat the street with Sector Rotation Strategy and according investing in sector ETFs.

Bond ETFs

If you are a risk-averse investor looking to gain exposure in ETFs, Bond ETFs are ideal for you. Also known as fixed-income ETFs, these invest in a portfolio of bonds, enabling you to reap the benefits of fixed-income investing. Investors get the opportunity to earn regular interest payments in the form of coupon payments.

Bond ETFs hold a portfolio of bonds of different issuers and maturity, thus inherently offering the benefit of diversification. They are used by investors for generating income, preserving capital and hedging against market risks. As they are traded like shares on stock exchanges, investors can buy and sell them anytime, thus offering liquidity and convenience.

LIC G-Sec LTE Fund – RP (G), SBI-ETF 10Y Gilt and Nippon ETF Long Term Gilt are examples of bond ETFs traded on the Bombay Stock Exchange and National Stock Exchange.

A screenshot of some of the Bond ETFs listed on the StockEdge App

The Advantages of Investing in ETFs

• Diversification: ETFs are great avenues of diversification as investing with ETF helps build a Portfolio that comprised of a variety of asset classes.
• Cost-effective: ETFs are passively managed, thus having lower expense ratios. Hence, they are more cost-effective than other investment tools such as mutual funds.
• Flexible: ETFs can be purchased and sold on stock exchanges throughout a trading day, thus providing liquidity and flexibility to investors.
• Tax-effective: By investing with ETF investors are allowed to benefit from capital gains of the underlying assets without the tax liability of owning a stock.

ETFs vs. Other Investment Options

Now let us come to a pertinent question – why should you choose investing in ETFs over other investment options? To answer this, let us compare ETFs with some other common investment tools:

ETFs vs. Mutual Funds

Exchange traded funds and mutual funds are often compared as they are both pools of investors’ money managed by a fund manager. However, there are quite a few dissimilarities between the two:

• While mutual funds are managed actively, ETFs are passively managed which leads to lower costs and lower expense ratios. ETFs also do not have front-end and back-end loads, which are often associated with mutual fund schemes. Hence, ETFs are more cost-effective than mutual funds.
• Unlike ETFs, mutual funds are not traded in the stock exchanges during market hours. As ETFs can be bought and sold during a trading day, ETFs are more flexible and liquid than mutual funds.

• ETFs present lesser tax liability due to their inherent fund structure. The capital gains are not realized until the shares are sold.
• Investors can choose from a variety of investment options while investing in ETFs such as index funds, bond funds, sector funds, and international funds.
• ETFs generally do not have a lock-in period while some mutual funds have a mandatory lock-in period before which the units cannot be sold.

ETFs vs. Stocks

• Due to its inherent nature, investing with ETF offer investors the flexibility of investing in a basket of stocks, without the need to buy individual ones. This helps investors to diversify their portfolios.
• With diversity comes the benefit of risk management as well, since the investor invests in a portfolio of stocks instead of a few individual stocks.
• By investing with ETF, investors can benefit from capital gains of underlying stocks as well as dividends or income generated by stocks.
• As ETFs can be traded in the stock exchanges on a real-time basis, investors enjoy the same kind of liquidity as stocks.

How to Start Investing in ETFs

So how can you start investing in ETFs in India? You need to follow three simple steps.

1. Get a Brokerage and Demat Account

As ETFs are traded in the stock exchanges, the modus operandi for buying and selling ETFs is similar to that of stocks. You need to open a brokerage account to trade ETFs and a demat account to hold the ETFs. Choose a reliable stock broker and complete the account opening process. You will have to submit certain documents and may have to fulfil certain criteria. Ensure that the broker provides access to the stock exchanges where the ETFs are listed. Once your account is opened, familiarize yourself with the trading platform offered by your broker.

2. Research and Select ETFs with StockEdge

Once your account with the broker is all set, the next step is to research the ETFs. StockEdge is the leading stock market research and analysis tool that has helped innumerable investors gain insight into the world of ETFs. StockEdge has various features to help you analyze ETFs based on different criteria such as asset class, sector or benchmark index.

You can view extensive details of each ETF as well, such as the screenshot given below:

A screenshot of the StockEdge App showing a detailed analysis of Nippon India ETF Nifty 100

Utilize the stock market trends, technical charts and other useful features to make informed investment decisions. Access real-time data, news, and analysis to stay up to date with market trends and make timely investment moves.

3. Purchase the ETF

Once you have completed your analysis and selected an ETF of your choice, place a buy order through your brokerage account. You will need to specify the number of ETF shares you want to purchase, your desired ETF share price and the exchange from where you want to buy (such as BSE or NSE). Review the transaction details, including trading costs before confirming the purchase transaction. The platform will execute the buy order once the price of the ETF reaches your desired price or the market conditions are favourable. After the purchase, the ETF shares will be credited to your demat account, and you will become a shareholder of the ETF.

What to Look for When Selecting ETFs?

As a beginner, you may not be sure of things to look at while analysing ETFs. Here’s a broad guidance on 3 things that you should consider.

1. Expense Ratios

The expense ratio of ETFs is the annual fees charged by the fund managers of the ETF to cover the cost of operating the funds such as administrative costs. Lower expense ratios can lead to higher investment returns, especially in the long term. However, a lower expense ratio is not a guarantee of superior investment performance. Compare the expense ratios of different ETFs within the same asset class or sector to find the most cost-effective option for you. While looking at expense ratios, also consider their expected returns and the investment.

You can find the latest expense ratio of each ETF on the StockEdge App. Simply search an ETF on the app and go to ‘info’. You will find the expense ratio listed there.

A screenshot of the StockEdge App showing the expense ratio of an ETF

2. Performance History

Performance history is an important factor while investing in any fund, including ETFs. Evaluate the net asset value (NAV) and the benchmark index tracked by the ETF. The key is to look for consistent and positive returns over the long term. Also, consider the performance of similar ETFs vis-à-vis the benchmark index. Finally, take a look at the fund’s investment objectives and the fund managers’ track record to assess the likelihood of achieving the desired outcomes.

The StockEdge App provides you with extensive data on the performance of each ETF. Simply search an ETF on the app and go to ‘performance’. You will find the performance history of the ETF during different periods.

A screenshot of the StockEdge App showing the performance history of an ETF

You can also click on the tab ‘ratio’ to see the relevant ratios related to the performance of the fund.

A screenshot of the StockEdge App showing ratios related to an ETF

3. Fund Management Style

The fund management style of the ETF, as in whether the fund is actively managed or passively, is an important factor. In actively managed funds, the fund manager’s investment decisions are aimed at outperforming the benchmark index. Passively managed ETFs, on the other hand, aim to replicate the performance of the benchmark index and may not involve the active selection of stocks.

Bear in mind that actively managed funds may have higher risks and costs compared to their passively managed counterparts. The fund manager’s expertise, investment strategies and the fund’s alignment with your investment goals and risk appetite are extremely important.

Risks Associated with ETF Investments

Finally comes the aspect of risks. ETFs are essentially market-related instruments and hence bear with them inherent market risks such as price volatility, market fluctuations and risks associated with underlying assets.

Additionally, buying and selling ETFs may involve the liability of capital gains tax based on the tax regulations of the jurisdiction where the ETF is listed. Moreover, the current market price of ETFs may deviate from the NAV due to trading costs, market demand and trading hours. As ETFs are traded in stock exchanges, they are bound by market hours, trading costs and trading limitations of those exchanges.

All these should be considered along with your risk tolerance, investment horizon and investment objectives before investing in ETFs.

Market Risk

An understanding of market risks is important before starting investing with ETF. Market risk is the possibility that the investor may experience losses in the value of their investment due to market fluctuations and factors such as volatility, economic factors, and geopolitical events. Diversification is an effective method of mitigating market risks. Monitoring the market and your portfolio regularly can also help you deal with market risk and make informed decisions.

So, given all these investment risks, is it worth starting investing with ETF? With their lower risk profile and cost-effectiveness, ETFs are good components to add to your portfolio.

ETFs – A Final Word

If you are wondering if investment with ETF is good or bad, there is no yes or no answer to it. Diversification, flexibility and low costs are some of the exchange traded funds features that make these a favourable investment choice.

If you are a beginner with limited knowledge of the market or a busy professional with no time to keep track of the market, ETFs are great alternatives for you. By including different kinds of ETFs, you can manage the risk of your portfolio while aiming for higher returns.