ETF Trading in India || Comparing ETFs and Mutual Funds

ETF Trading in India: A Comprehensive Guide and Comparison with Mutual Funds 2025

Introduction to ETF Trading in India

Exchange-Traded Funds (ETFs) have emerged as a popular investment vehicle in India, offering investors a cost-effective and flexible way to diversify their portfolios. Traded on stock exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), ETFs combine the diversification benefits of mutual funds with the trading flexibility of stocks. As of 2025, the Indian ETF market has grown significantly, with assets under management (AUM) increasing five-fold since 2018, reflecting investor confidence in this instrument. This article explores ETF trading in the Indian market, compares ETFs with mutual funds, and highlights their benefits, risks, and strategies to help investors make informed decisions.

With the Indian economy projected to maintain robust growth, driven by a young population and increasing integration into global markets, ETFs provide an accessible way to participate in this growth. Whether you’re a beginner or a seasoned investor, understanding ETFs and their differences from mutual funds is crucial for building a balanced portfolio. This SEO-optimized guide will cover everything you need to know about ETF trading in India, including practical tips for success.

What Are ETFs?

ETFs are investment funds that track specific indices, sectors, commodities, or asset classes, such as the Nifty 50, Sensex, gold, or banking sector. They are passively managed, meaning they aim to replicate the performance of their underlying index rather than outperform it. ETF units are listed and traded on stock exchanges, allowing investors to buy and sell them throughout the trading day at market prices, which may slightly differ from their Net Asset Value (NAV) due to supply and demand dynamics.

In India, ETFs cover a wide range of asset classes, including:

Equity ETFs: Track indices like Nifty 50 or Sensex (e.g., Nippon India ETF Nifty BeES).
Bond ETFs: Invest in fixed-income securities like government bonds (e.g., Bharat Bond ETF).
Commodity ETFs: Focus on assets like gold or silver (e.g., ICICI Prudential Gold ETF).
Sectoral ETFs: Target specific sectors like banking or technology (e.g., SBI ETF Banking).

The first ETF in India, Nifty BeES, was launched in 2001, and the market has since expanded to over 100 ETFs, primarily passively managed. Their low costs, transparency, and liquidity make them attractive for retail investors.

Top 10 best ETF in Indian Stock Market 2025

1. SBI ETF Nifty 50

Tracks: Nifty 50 Index (top 50 companies in India).
Performance: 1-year return of ~28.52%, 5-year return of ~15.6% (as of January 2025).
Expense Ratio: ~0.05% (one of the lowest in India).
AUM: ₹2,12,886 crore (as of January 2025).
Why It’s Good: Offers broad market exposure to India’s largest companies, ideal for stable, long-term growth with low costs. Perfect for beginners or conservative investors.

2. Nippon India ETF Nifty 50 BeES

Tracks: Nifty 50 Index.
Performance: 1-year return of ~12.1%, 5-year return of ~101.17% (as of November 2024).
Expense Ratio: ~0.05%.
AUM: Significant but not specified in recent data (historically one of the largest).
Why It’s Good: A pioneer ETF in India (launched in 2001), offering consistent returns and high liquidity. Suitable for investors seeking reliability and diversification.

3. UTI S&P BSE Sensex ETF

Tracks: S&P BSE Sensex Index (top 30 companies in India).
Performance: 1-year return of ~25.59%, 5-year return of ~14.8% (as of January 2025).
Expense Ratio: ~0.05% (lowest among peers).
AUM: ₹47,976 crore (as of January 2025).
Why It’s Good: Focuses on blue-chip stocks, providing stability and steady growth. A great option for risk-averse investors looking for long-term wealth creation.

4. CPSE ETF

Tracks: Nifty CPSE Index (Central Public Sector Enterprises).
Performance: 1-year return of ~13.80%, 5-year return of ~430.85% (as of January 2025).
Expense Ratio: ~0.07%.
AUM: ₹23,025.67 crore (as of January 2025).
Why It’s Good: High growth potential due to exposure to government-backed companies like NTPC and Coal India. Best for investors comfortable with higher risk for potentially higher returns.

5. ICICI Prudential Nifty Midcap 150 ETF

Tracks: Nifty Midcap 150 Index.
Performance: 1-year return of ~49.80%, 5-year return of ~31.48% (as of January 2025).
Expense Ratio: Not specified, but typically low for midcap ETFs (~0.20%).
AUM: Not specified in recent data.
Why It’s Good: Targets mid-cap companies with high growth potential, ideal for aggressive investors seeking higher returns over the long term.

6. Nippon India ETF PSU Bank BeES

Tracks: Nifty PSU Bank Index.
Performance: 1-year return of ~9.43%, 5-year return of ~10.12% (as of January 2025).
Expense Ratio: ~0.19%.
AUM: ₹10,725.95 crore (as of January 2025).
Why It’s Good: Provides sector-specific exposure to public sector banks, which may benefit from government policies and economic reforms. Suitable for sectoral diversification.

7. Motilal Oswal NASDAQ 100 ETF

Tracks: NASDAQ 100 Index (U.S.-listed tech-heavy index).
Performance: 1-year return of ~34.1%, 5-year return of ~23.6% (as of January 2025).
Expense Ratio: ~0.58%.
AUM: ₹8,299 crore (as of January 2025).
Why It’s Good: Offers international exposure to U.S. tech giants like Apple and Microsoft, ideal for diversifying beyond Indian markets. Best for investors seeking global growth opportunities.

8. Nippon India ETF Nifty Next 50 BeES

Tracks: Nifty Next 50 Index (next 50 companies after Nifty 50).
Performance: 1-year return of ~28%, 3-year return of ~21.11% (as of January 2025).
Expense Ratio: ~0.20%.
AUM: ₹267.51 crore (as of January 2025).
Why It’s Good: Focuses on emerging large-cap stocks with potential to become future Nifty 50 constituents. Good for growth-oriented investors.

9. Invesco India Gold ETF

Tracks: Domestic gold prices.
Performance: Average 3-year return of ~36.56% (as of April 2025).
Expense Ratio: ~0.55%.
AUM: Not specified in recent data.
Why It’s Good: Provides a hedge against inflation and economic uncertainty without the hassle of physical gold storage. Ideal for conservative investors looking for stability.

10. Bharat Bond ETF

Tracks: A portfolio of government-backed bonds.
Performance: Not specified, but known for stable returns due to low-risk bond investments.
Expense Ratio: ~0.05%.
AUM: Not specified in recent data.
Why It’s Good: Offers exposure to high-quality bonds, providing safety and predictable returns. Best for risk-averse investors seeking fixed-income options.

What Are Mutual Funds?

Mutual funds pool money from multiple investors to create a diversified portfolio of stocks, bonds, or other securities. They are managed by professional fund managers who make investment decisions based on the fund’s objectives, which could be growth, income, or a combination. Mutual funds can be actively or passively managed:

Actively Managed Funds: Aim to outperform a benchmark index through strategic buying and selling.
Passively Managed Funds: Track an index, similar to ETFs, but are not traded on exchanges.

Mutual funds are purchased directly from Asset Management Companies (AMCs) or distributors at the end-of-day NAV, and transactions are processed once daily. The Indian mutual fund industry has seen AUM grow over six-fold from 2013 to 2023, driven by investor interest in diversified, professionally managed portfolios.

ETF Trading in India: How It Works

To trade ETFs in India, investors need a demat and trading account with a registered broker, as ETFs are bought and sold like stocks on exchanges. Here’s a step-by-step guide to ETF trading:

Open a Demat and Trading Account: Choose a reliable broker like Zerodha, 5paisa, or Appreciate Wealth, which offers low-cost ETF trading.
Fund Your Account: Transfer money to your trading account for seamless transactions.
Research ETFs: Use tools like ETF screeners on platforms like Groww or Moneycontrol to analyze performance, expense ratios, and liquidity.
Place Orders: ETFs support various order types, such as market orders, limit orders, or stop-loss orders, offering greater control over trade execution.
Monitor and Trade: Track real-time prices and trade throughout the day to capitalize on market movements.

Popular platforms like 5paisa and Appreciate Wealth simplify ETF trading with user-friendly apps and low entry barriers (investments starting from ₹1). However, investors should be aware of brokerage fees, Securities Transaction Tax (STT), and bid-ask spreads, which can impact returns.

Comparing ETFs and Mutual Funds: Key Differences

While both ETFs and mutual funds offer diversification, they differ in structure, trading, costs, and management. Below is a detailed comparison based on key parameters:

1. Trading Flexibility

ETFs: Traded on stock exchanges throughout the day, allowing investors to buy or sell at real-time market prices. This intraday trading capability enables quick responses to market fluctuations.
Mutual Funds: Traded only once daily at the end-of-day NAV, offering less flexibility. Investors cannot capitalize on intraday price movements.
Verdict: ETFs are ideal for active traders who value timing and price control, while mutual funds suit investors who prefer a set-and-forget approach.

2. Management Style

ETFs: Predominantly passively managed, tracking an index like Nifty 50 or Sensex. This reduces the risk of fund manager errors.
Mutual Funds: Can be actively or passively managed. Active funds rely on fund managers to outperform benchmarks, while passive funds (index funds) mimic indices like ETFs.
Verdict: ETFs and passive mutual funds are similar in their passive approach, but active mutual funds may appeal to those seeking higher returns through expert management.

3. Cost Efficiency

ETFs: Typically have lower expense ratios (as low as 0.10% in India) due to passive management. However, investors incur brokerage fees and STT per transaction.
Mutual Funds: Actively managed funds have higher expense ratios due to research and management costs. Passive index funds have lower fees, but mutual funds may also charge entry/exit loads.
Verdict: ETFs are generally more cost-efficient for long-term investors, but mutual funds with no exit loads can be competitive.

4. Liquidity

ETFs: Highly liquid, especially for large ETFs like Nifty 50 ETFs, as they trade like stocks. However, smaller ETFs may have lower liquidity, leading to wider bid-ask spreads.
Mutual Funds: Liquid but less flexible, as redemptions are processed within 1-2 days at NAV. They are not traded on exchanges, reducing intraday liquidity.
Verdict: ETFs offer superior liquidity for frequent traders, while mutual funds are sufficient for long-term investors.

5. Tax Efficiency

ETFs: More tax-efficient due to fewer capital gains distributions, as they are traded between investors on exchanges rather than redeemed from the fund.
Mutual Funds: Actively managed funds may generate more capital gains, leading to higher tax liabilities. Passive mutual funds are more tax-efficient but less so than ETFs.
Verdict: ETFs are preferable for tax-conscious investors, especially in taxable accounts.

6. Minimum Investment

ETFs: Require the cost of a single share, which can be as low as ₹100, making them accessible to small investors.
Mutual Funds: Often require a minimum investment of ₹100 for Systematic Investment Plans (SIPs) or ₹500 for lumpsum investments, though some funds have higher thresholds.
Verdict: Both are accessible, but ETFs offer slightly more flexibility for micro-investments.

7. Diversification

ETFs: Provide exposure to a basket of securities, reducing individual stock risk. They cover diverse asset classes, from equities to commodities.
Mutual Funds: Also offer diversification, typically holding 30-60 securities across sectors. Actively managed funds may adjust holdings to optimize returns.
Verdict: Both are effective for diversification, but ETFs provide broader market exposure with a single transaction.

8. Transparency

ETFs: Highly transparent, with daily updates on holdings, allowing investors to see exactly what assets the fund owns.
Mutual Funds: Less transparent, as holdings are typically disclosed quarterly, which may limit visibility into portfolio changes.
Verdict: ETFs are better for investors who prioritize transparency.

Benefits of ETFs in the Indian Market

ETFs offer several advantages that make them a compelling choice for Indian investors:

Cost-Effectiveness: With expense ratios as low as 0.10%, ETFs are among the cheapest investment options in India, maximizing net returns over time.
Flexibility: Intraday trading allows investors to react to market changes, use limit orders, or short-sell, offering greater control.
Diversification: A single ETF can provide exposure to an entire index, sector, or asset class, reducing risk.
Tax Efficiency: Lower capital gains distributions result in reduced tax liabilities compared to actively managed funds.
Transparency: Daily disclosure of holdings ensures investors know exactly where their money is invested.
Accessibility: Low entry barriers (starting from ₹1) make ETFs suitable for retail investors with limited capital.
Liquidity: Large ETFs like Nifty 50 ETFs trade at high volumes, ensuring easy entry and exit.

Benefits of Mutual Funds in the Indian Market

Mutual funds also offer unique advantages, particularly for long-term, goal-based investing:

Professional Management: Actively managed funds benefit from expert fund managers who aim to outperform benchmarks, potentially yielding higher returns.
SIP Convenience: Systematic Investment Plans allow disciplined investing with small, regular contributions, ideal for salaried individuals.
Diversification: Exposure to 30-60 securities across sectors minimizes risk.
Long-Term Performance: In emerging markets like India, actively managed mutual funds have historically outperformed ETFs due to high-growth opportunities in small and mid-cap stocks.
Simplified Transactions: Investors can buy or redeem units directly from AMCs without needing a demat account, reducing complexity.
Variety of Options: From equity to debt to hybrid funds, mutual funds cater to diverse risk profiles and financial goals.

Risks to Consider

ETF Risks

Market Risk: ETF values fluctuate with the underlying assets, exposing investors to market volatility.
Tracking Error: ETFs may not perfectly mirror their benchmark index due to fees or market inefficiencies.
Liquidity Risk: Smaller ETFs may have low trading volumes, leading to wider bid-ask spreads and higher trading costs.
Hidden Costs: Brokerage fees, STT, and impact costs can erode returns, especially for frequent traders.

Mutual Fund Risks

Manager Risk: Active funds rely on fund managers, whose decisions may underperform the market.
Higher Costs: Expense ratios and exit loads can reduce net returns compared to ETFs.
Tax Implications: Frequent portfolio turnover in active funds may trigger capital gains taxes.
Liquidity Constraints: Redemptions take 1-2 days, limiting flexibility during market volatility.

ETF Trading Strategies for the Indian Market

To maximize returns and minimize risks, consider these ETF trading strategies tailored for India:

Invest in Large, Liquid ETFs: Focus on ETFs like Nippon India ETF Nifty BeES or ICICI Prudential Gold ETF, which have high trading volumes and lower bid-ask spreads.
Use Limit Orders: Set specific buy or sell prices to avoid overpaying due to market fluctuations.
Diversify Across Asset Classes: Combine equity, bond, and commodity ETFs to balance risk and reward.
Leverage SIPs for ETFs: Some platforms allow SIPs in ETFs, enabling disciplined, long-term investing similar to mutual funds.
Monitor Tracking Error: Choose ETFs with low tracking errors to ensure they closely follow their benchmark index.
Stay Informed: Use tools like Moneycontrol or 5paisa to track market trends and ETF performance.

Which Is Better: ETFs or Mutual Funds?

The choice between ETFs and mutual funds depends on your financial goals, risk tolerance, and investment style:

Choose ETFs If: You prefer low-cost, passive investments, want intraday trading flexibility, prioritize tax efficiency, or seek transparency. ETFs are ideal for active traders or those investing in broad market indices.
Choose Mutual Funds If: You value professional management, prefer SIPs for disciplined investing, or aim for potentially higher returns through active strategies. Mutual funds suit long-term, goal-based investors who don’t need intraday liquidity.

For example, a young professional aiming for retirement in 20 years might opt for mutual fund SIPs in a diversified equity fund for consistent growth. Conversely, a trader looking to capitalize on short-term market trends might prefer a Nifty 50 ETF for its liquidity and low costs.

Conclusion

ETF trading in India offers a powerful way to invest in diversified portfolios with low costs, high liquidity, and tax efficiency. While ETFs excel in flexibility and transparency, mutual funds provide professional management and SIP convenience, making them suitable for different investor profiles. By understanding their differences and leveraging strategies like investing in liquid ETFs or using limit orders, you can align your investments with your financial goals.

Whether you choose ETFs, mutual funds, or a combination, always research thoroughly, assess your risk tolerance, and consult a financial advisor if needed. Start exploring platforms like 5paisa, Groww, or Appreciate Wealth to kickstart your investment journey in India’s dynamic market.

Disclaimer: Investments in securities markets are subject to market risks. Read all related documents carefully before investing.

Post Views: 60