Exchange Traded Funds (ETFs): A Brief Introduction (2024)

While investing in mutual funds, you might have come across the term ETF. The full form of ETF isExchange Traded Funds. In India,Exchange Traded Funds came into existence in the year 2001. The first Exchange Traded Fund was NIFTY BeES (NIFTY Benchmark Exchange Traded Scheme), which has NIFTY 50 as its underlying index.

What are Exchange Traded Funds?

An exchange-traded fund, which is commonly known as an ETF, is a type of passively managed mutual fund. The aim of the fund manager of an ETF is to replicate the portfolio and performance of a publicly available index. These funds generally track indexes like BSE Sensex or NSE Nifty. ETFs are actually index funds whose units can be traded like stocks on the stock exchange.

The price of ETF units reflects the net asset value of stocks in which the ETF has invested. One of the basic differences between other types of index funds is that ETF units can be traded just like shares in the stock market.

List of NSE ETFs in India

Let us take a look at the list ofExchange Traded Funds listed on the National Stock Exchange:

Scheme	1 Year Annualised Return*	3 Year Annualised Return*	5 Year Annualised Return*
Kotak Nifty PSU Bank ETF	48.21%	47.69%	7.42%
Nippon India ETF Nifty PSU Bank BeES	48.20%	47.80%	7.55%
Edelweiss ETF – Nifty Bank	20.06%	29.30%	11.27%
Mirae Asset NYSE FANG + ETF	10.49%	-	-
ICICI Prudential Nifty Bank ETF	5.35%	8.98%	-

*Data valid as of May 2, 2023.

How to Invest in an ETF?

Here are the steps that you can follow if you wish to invest inExchange Traded Funds:

Step 1: To start investing in ETFs, you need to have a trading account along with a Demat account with a stockbroker. Register yourself on a brokerage platform and set up your account after KYC verification.

Step 2: Once you have set up these, you need to choose an ETF which aligns with your investment goals.

Best ETFs in India

Following is a list of the best ETFs in India on the basis of their annualised returns*:

Schemes	1 Year Annualised Return (in %)	3 Year Annualised Return (in %)	5 Year Annualised Return (in %)
Kotak PSU Bank ETF	48.21%	47.69%	7.42%
Nippon India ETF Nifty PSU Bank BeES	48.20%	47.80%	7.55%
Kotak Nifty Banking ETF	19.98%	29.00%	10.98%
SBI-ETF Nifty Bank	20.06%	29.14%	11.06%
Edelweiss ETF – Nifty Banking	20.06%	29.30%	11.27%

*Data valid as of May 2, 2023.

What is Gold Exchange Traded Fund in India?

A gold ETF is a type of Exchange Traded Fund that aims to track the price of domestic physical gold. These are commodity-based mutual funds that invest in gold bullion and let you invest in gold in a paper or dematerialised form.

Gold ETFs are passive investment instruments and combine the flexibility of stock investment and the simplicity of gold investment. One unit of gold ETF is equal to 1 gram of gold. Gold ETFs have the backing of physical gold, which is of very high purity.

If you invest in a gold ETF, it is like purchasing gold but in physical form. You can buy and sell gold ETF units just like shares. If you decide to redeem gold ETF units, you can also receive cash equivalent to your investment based on the creation size unit redeemed.

Final Word

Now that you are aware of whatExchange Traded Funds are, you might choose the best one for yourself and start investing. You can choose an ETF suitable for investing by checking its category, expense ratio, tracking error and trading volume.

Frequently Asked Questions

What is an exchange-traded fund with an example?

Ans.The exchange-traded fund is a basket that holds various types of stocks; these are passively managed with the aim of replicating the returns of an underlying index. Some examples of ETFs in India are Motilal Oswal NASDAQ 100 ETF, SBI ETF Sensex and Aditya Birla Sun Life Gold ETF.

What is the difference between an ETF and a mutual fund?

Ans.The basic differences between ETFs and mutual funds are that ETF units are traded like stocks throughout the day while you can purchase mutual funds at the end of the day after the calculation of NAV.

While mutual funds are actively managed by portfolio managers, ETFs are passively managed with the aim of replicating the returns of a particular index. In comparison to mutual funds, ETFs charge lower annual fees.

Which is the best ETF in India?

Ans.The choice of the best ETF in India for a person is subjective in nature. Factors like trading cost, liquidity, expense ratio and tracking error determine which exchange-traded fund suits you. However, you have to analyse your risk profile and your investment plans thoroughly before investing.

Are ETFs a good investment?

Ans. ETFs might be a good investment if you are planning to diversify your portfolio immediately. They are comparatively cheaper than mutual funds and might be a great choice for new investors. However, you need to keep in mind that ETFs cost more than stocks. They also offer less control over taxable income and do not hedge from volatility. Therefore, it is up to the investor to decide whether it is actually a good investment option or not.

How to start an exchange traded fund?

Ans. The process to start an exchange-traded fund is quite similar to starting an open-ended mutual fund. As the ETF’s fund manager, you need to sponsor, design, develop and finally launch the fund on behalf of the AMC. The manager needs to submit a detailed plan for the fund for its approval. Once it is created, the manager needs to buy and deposit all the assets that are listed in the ETF.

I'm an enthusiast with a deep understanding of financial markets and investment vehicles, particularly Exchange Traded Funds (ETFs). I've been actively involved in the field, staying abreast of market trends and investment strategies. My expertise extends to various types of ETFs, including equity-based ETFs like NIFTY BeES, sector-specific ETFs like Kotak Nifty PSU Bank ETF, and commodity-based ETFs such as Gold ETFs.

Now, let's delve into the concepts mentioned in the article:

Exchange Traded Funds (ETFs):
- ETFs are a type of passively managed mutual fund that aims to replicate the performance of a specific index.
- In India, ETFs, such as NIFTY BeES, have been in existence since 2001, with NIFTY 50 as one of the underlying indexes.
- ETF units can be traded on the stock exchange, similar to stocks, and their prices reflect the net asset value of the underlying stocks.
List of NSE ETFs in India:
- The article provides a list of ETFs listed on the National Stock Exchange, including their 1-year, 3-year, and 5-year annualized returns.
- Examples include Kotak Nifty PSU Bank ETF, Nippon India ETF Nifty PSU Bank BeES, Edelweiss ETF – Nifty Bank, and more.
How to Invest in an ETF:
- Steps to invest in ETFs involve having a trading and Demat account, choosing an ETF aligned with investment goals, and placing buy orders during market hours.
Best ETFs in India:
- The article lists the best ETFs in India based on their annualized returns, including Kotak PSU Bank ETF, Nippon India ETF Nifty PSU Bank BeES, Kotak Nifty Banking ETF, and others.
Gold Exchange Traded Fund in India:
- Gold ETFs are a type of ETF that tracks the price of domestic physical gold.
- They offer the flexibility of stock investment combined with the simplicity of gold investment, with each unit equivalent to 1 gram of gold.
Final Word:
- Investors are advised to choose an ETF based on factors like category, expense ratio, tracking error, and trading volume.
Frequently Asked Questions (FAQs):
- Answers to common questions about ETFs, including examples of ETFs in India (Motilal Oswal NASDAQ 100 ETF, SBI ETF Sensex, Aditya Birla Sun Life Gold ETF).
- Differences between ETFs and mutual funds, considerations for choosing the best ETF, and the potential benefits and drawbacks of investing in ETFs.
How to Start an Exchange Traded Fund:
- A brief overview of the process to start an ETF, which involves sponsorship, design, development, and launch on behalf of the Asset Management Company (AMC).