Exchange-Traded Fund

Indian Economy glossary

Also called: ETF · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT

Meaning

An Exchange-Traded Fund (ETF) is a fund that holds a group of assets, such as the shares in an index, gold, or bonds. Its units are listed and traded on a stock exchange like a share, so the price changes all through the trading day.

ETFs give a small investor cheap, spread-out exposure to a whole market or commodity in one purchase. In India the government has also used ETFs to sell its stakes in public-sector companies (disinvestment) and to raise money through PSU bonds.

Each ETF unit has a Net Asset Value, like any fund: NAV = (Market value of assets − Liabilities) ÷ Number of units outstanding

Explanation

How an ETF works

  • Step 1: the fund is built. An AMC (Asset Management Company), the company that invests the fund's money, puts together a basket of assets. The basket copies a chosen benchmark, such as the Nifty 50 index, gold, or a set of bonds.
  • Step 2: units are listed. The fund's units are listed on a stock exchange.
  • Step 3: investors trade on the exchange. Investors buy and sell units there through a broker, at the live market price, not at a price fixed once a day.

  • For this they need a demat account (an electronic account that holds securities).

  • It is passive. Most ETFs do not pick stocks. They simply copy the benchmark.

  • Because nobody is paid to pick stocks, the expense ratio (the yearly fee, charged as a share of the fund's assets) stays low.

Price vs NAV: a worked example

  • The fund holds assets worth ₹1,050 crore. It owes ₹50 crore (fees and payables). It has 50 crore units.

  • NAV = (1,050 − 50) ÷ 50 = ₹20 per unit.

  • On the exchange, the unit's price is set by buyers and sellers, so it can move slightly away from ₹20.

  • Premium: the price is above NAV, because buyers are rushing in.
  • Discount: the price is below NAV, because sellers are rushing out.

  • Large traders can create or redeem units directly with the AMC. This keeps the market price close to NAV.

  • Tracking error = the gap between the ETF's return and its benchmark's return. It comes from fees, cash held by the fund, and timing. A good ETF keeps this gap small.

  • Trap: a low NAV or low price does not make an ETF "cheap". What matters is the percentage change in value.

Types of ETF

Type What it holds Indian example
Equity / index ETF Shares in an index Nifty BeES (2001), India's first ETF
Disinvestment ETF Shares of public-sector companies CPSE ETF (2014), Bharat 22 ETF (2017)
Bond ETF Bonds Bharat Bond ETF (2019), which holds PSU bonds
Gold ETF Physical gold Available since 2007

What makes an ETF's value rise or fall

  • The underlying assets. If the index, gold price or bond prices go up, the NAV goes up. If they fall, the NAV falls.
  • Interest rates (bond ETFs). When interest rates rise, existing bonds lose value, so the bond ETF's NAV falls.
  • Demand and supply on the exchange. These decide the premium or discount to NAV.
  • Liquidity. If an ETF is traded rarely (thin trading), buyers and sellers may have to accept a worse price.

In India

  • Regulation
  • In India, ETFs are mutual fund schemes run by AMCs. SEBI regulates them under the SEBI (Mutual Funds) Regulations, 1996.
  • AMFI (Association of Mutual Funds in India) is only the industry body. It is not the regulator.

  • ETFs fall in the passive "other" group under SEBI's scheme categorisation of 2017.

  • Milestones

  • Nifty BeES (2001): India's first ETF.
  • Gold ETF (from 2007): lets investors own gold in electronic form.
  • CPSE ETF (2014) and Bharat 22 ETF (2017): tools of disinvestment.
    • The government put its shares in several PSUs into one ETF.
    • Investors bought ETF units, and the government received the money.
    • The government could sell many stakes in one go, and investors got a spread-out PSU portfolio.

  • Bharat Bond ETF (2019): holds PSU bonds. It was India's first corporate-bond ETF.

  • Reach: ETFs can only be held in a demat account. Total demat accounts reached 22.5 crore (2025-26) [1]. This is the pool of people who can buy ETFs.

  • Wider MF context: mutual fund AUM (the total market value of the money funds manage) rose from ₹65.7 lakh crore (March 2025) to ₹73.7 lakh crore (March 2026) [1]. ETFs are part of this pool.

Don't confuse with

  • Index fund: it copies an index just like an ETF does. But you buy it from the AMC at the day-end NAV, and you do not need a demat account. An ETF is bought on the exchange at the live price and needs a demat account.
  • Sovereign Gold Bond (SGB): it pays fixed interest but has a lock-in and trades thinly. A Gold ETF pays no interest but is highly liquid (easy to sell) on the exchange.
  • Closed-ended fund: it is also listed, but it has a fixed term and takes in new money only at launch. An ETF's units can be created and redeemed on an ongoing basis.
  • Fund of funds (FoF): it invests in other funds, not directly in securities. An ETF holds the securities or gold directly.

Prelims Hooks

  • ETF = a fund that tracks an index, commodity or basket of assets and trades on a stock exchange like a share. Its price changes during the day, and a demat account is needed.
  • Nifty BeES (2001) was India's first ETF. The Gold ETF has existed since 2007.
  • Disinvestment ETFs: CPSE ETF (2014) and Bharat 22 ETF (2017). Bharat Bond ETF (2019) holds PSU bonds and was India's first corporate-bond ETF.
  • Regulator: SEBI, under the MF Regulations, 1996. AMFI is only the industry body.
  • Trap: "Gold ETFs pay annual interest." This is false. Only SGBs pay fixed interest.
  • Trap: "An index fund and an ETF are both bought at day-end NAV." This is false. Only the index fund is. An ETF trades at the live market price.

Mains Points

  • ETFs as a disinvestment tool
  • CPSE ETF (2014) and Bharat 22 (2017) let the government sell stakes in many PSUs through one product.
  • This reaches retail investors and avoids selling each company's shares one by one.

  • Trade-offs:

    • The government keeps effective control, so critics say this is "sale without reform".
    • Prices depend on market mood at the time of each sale.
    • Heavy PSU concentration means investors carry sector risk.

  • Financialisation of savings and a deeper bond market

  • Gold ETFs move household savings from physical gold into financial form, with no storage, purity or making-charge risk.
  • This helps cut the gold imports that widen the current account deficit (India paying the world more than it earns from it).

  • Bharat Bond ETF (2019) lets small investors buy PSU bonds. This helps deepen India's thin corporate-bond market.

  • Passive investing: benefits and limits

  • Low-cost ETFs suit first-time investors. Their reach grows with 22.5 crore demat accounts (2025-26) [1].
  • Risks:
    • Heavy passive flows push money into index heavyweights, whatever those companies' quality.
    • Thinly traded ETFs can trade far from NAV.
    • First-time investors need investor education to understand tracking error and liquidity.

Related concepts

Read more

Sources

  1. 1SEBI Annual Report 2025-26, Chapter 1: Introductionsebi.gov.in · tier 1