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Exchange-Traded Funds (ETF) in India

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Exchange-Traded Funds (ETFs) in India are mutual fund schemes whose units trade on stock exchanges throughout the trading day, similar to listed equity shares. ETFs combine the diversification of mutual funds with the intra-day liquidity and price discovery of exchange-listed securities. Indian ETFs are regulated by SEBI under the SEBI (Mutual Funds) Regulations 1996 and operate through the NSE and BSE exchanges with associated market makers (Authorised Participants) providing liquidity and price-keeping.

For an Indian retail investor, ETFs offer:

  • Low-cost passive exposure: Most ETFs charge TER under 0.50 per cent annually, materially below most active mutual funds.
  • Intraday liquidity: Buy and sell during market hours at real-time prices.
  • Tax efficiency: ETFs typically have lower portfolio turnover than active funds, reducing tax leakage.
  • Transparent holdings: ETFs publish daily holding disclosures.

This article covers the ETF structure, the SEBI regulatory framework, the major ETF categories, the trading mechanics, the tax treatment, and the growth trajectory of the Indian ETF market.

ETF structure

Open-ended scheme on exchange

ETFs are open-ended mutual fund schemes that:

  • Hold a portfolio of underlying securities (equity, debt, gold, etc.) per the scheme’s investment objective.
  • Issue units that are listed and traded on stock exchanges.
  • Publish daily Net Asset Value (NAV) per unit.
  • Allow continuous creation and redemption of units through Authorised Participants (APs).

Creation and redemption

ETF units are created and redeemed through Authorised Participants, who:

  • Create units: Deposit a basket of underlying securities (or cash equivalent) with the AMC in exchange for ETF units. Standard creation size is typically 50,000-1,00,000 units.
  • Redeem units: Return ETF units to the AMC in exchange for the underlying basket or cash.

The creation/redemption mechanism keeps ETF market prices close to NAV through arbitrage. When market price diverges from NAV, APs arbitrage the difference by creating or redeeming units, profiting from the spread while pushing market price toward NAV.

Market makers

ETF market makers provide continuous bid-ask quotes during trading hours, ensuring intraday liquidity. The spread typically:

  • Liquid index ETFs (Nifty 50, etc.): Tight spreads of 1-5 basis points.
  • Less-liquid ETFs: Wider spreads of 10-50 basis points.

Major ETF categories in India

Equity ETFs

  • Nifty 50 ETFs: Nifty BeES (the original 2002 launch), Nifty 50 ETFs from major AMCs.
  • Sensex ETFs: SBI Sensex ETF, others.
  • Nifty Next 50 ETFs.
  • Nifty Midcap 150 ETFs.
  • Nifty Smallcap 250 ETFs.
  • Sectoral ETFs: Bank BeES, Nifty IT ETFs.
  • Thematic ETFs: ESG, ICEAdjust, etc.

Gold ETFs

Gold ETFs hold physical gold (typically 99.5 per cent purity, held in vaults by the custodian) and issue units corresponding to gold quantity. Gold ETFs include:

  • SBI Gold ETF.
  • Nippon India ETF Gold BeES.
  • HDFC Gold ETF.
  • ICICI Prudential Gold ETF.
  • Kotak Gold ETF.

Silver ETFs

Following SEBI’s October 2021 silver-ETF framework, Silver ETFs were launched in 2022 by multiple AMCs:

  • Nippon India Silver ETF.
  • ICICI Prudential Silver ETF.
  • Kotak Silver ETF.
  • HDFC Silver ETF.

Debt ETFs

Debt ETFs include:

  • Bharat Bond ETF (target-maturity government PSU bonds).
  • Liquid ETFs.
  • Gilt ETFs.
  • Corporate bond ETFs.

International ETFs

International ETFs provide exposure to foreign equity:

  • Nasdaq 100 ETFs (Motilal Oswal Nasdaq 100 ETF).
  • S&P 500 ETFs.
  • Hang Seng ETFs (Hong Kong / China exposure).
  • FTSE 100 ETFs.

Government-backed ETFs

  • CPSE ETF : basket of central public sector enterprise stocks.
  • Bharat 22 ETF : basket of 22 PSU and private holdings.

Trading mechanics

Exchange trading

ETFs trade on NSE and BSE during market hours (9:15 am to 3:30 pm IST). Investors:

  • Buy ETFs through their demat-trading account, just like equity shares.
  • Pay/receive market price (which may diverge slightly from NAV).
  • Settle at T+1 per the current Indian equity settlement cycle.

Demat-mode required

ETF units are held in demat mode at CDSL or NSDL . Investors need an active demat account; folio-mode holding is not available for ETFs.

ETFs publish:

  • End-of-day NAV: Based on closing prices of underlying holdings.
  • Indicative NAV (iNAV): Continuously updated during trading hours, reflecting underlying-portfolio market value in real time.

The iNAV helps investors and market makers track fair value during the trading day.

Bid-ask spread

Most retail-relevant ETFs have tight bid-ask spreads:

  • Nifty BeES, Bank BeES, Gold BeES: Often 1-3 basis points.
  • Less liquid sectoral and international ETFs: 10-100 basis points.

Wider spreads increase the all-in cost of ETF trading; investors should check spreads before placing orders.

Costs

TER

ETF TER is capped by SEBI at 1.00 per cent for passive schemes. In practice, most retail-relevant Indian ETFs charge TER between 0.05 and 0.50 per cent:

  • Nifty 50 ETFs: 0.05 to 0.10 per cent (very low).
  • Sectoral and thematic ETFs: 0.10 to 0.30 per cent.
  • Gold ETFs: 0.50 to 0.80 per cent.
  • International ETFs: 0.50 to 1.00 per cent.

Trading costs

Beyond TER, ETF investors face:

  • Brokerage: Typically 0.10 to 0.50 per cent per transaction (lower with discount brokers).
  • STT (Securities Transaction Tax): 0.001 per cent on equity ETF sell.
  • Stamp duty: 0.015 per cent on buy.
  • GST: 18 per cent on brokerage and exchange charges.
  • Bid-ask spread: Effective cost depending on order placement.

Tax treatment

Equity ETFs

Equity-oriented ETFs (where the scheme invests at least 65 per cent in Indian equity) are taxed as equity-oriented mutual funds :

  • LTCG (>12 months): 12.5 per cent above Rs 1.25 lakh annual exemption.
  • STCG (≤12 months): 20 per cent.

Gold ETFs

Gold ETFs are taxed per gold-investment rules. Post-April 2023, gold ETF gains are taxed at slab rate as short-term regardless of holding period, similar to debt mutual fund taxation 2023 treatment.

Debt ETFs

Debt ETFs follow the post-2023 debt taxation: all gains taxed at slab rate.

International ETFs

International ETFs follow the gold-debt taxation treatment (slab rate, no holding-period benefit).

ETF AUM growth in India

Indian ETF AUM has grown materially:

  • 2010: Approximately Rs 5,000 crore.
  • 2015: Approximately Rs 30,000 crore.
  • 2020: Approximately Rs 2,00,000 crore.
  • 2024: Approximately Rs 7,00,000 crore.

The growth has been driven by:

  • EPFO and other large institutional flows into Nifty 50 ETFs.
  • Retail interest in low-cost passive index ETFs.
  • Government promotional initiatives (CPSE ETF, Bharat 22 ETF, Bharat Bond ETF).
  • The Zerodha Fund House and other passive-only AMC launches.

See also

External references

References

  1. SEBI (Mutual Funds) Regulations 1996 covering ETF provisions.
  2. SEBI October 2021 framework on silver ETFs.
  3. AMFI ETF industry data.
  4. NSE and BSE ETF segment documentation.

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The WebNotes Editorial Team covers Indian capital markets, payments infrastructure and retail investor procedures. Every article is fact-checked against primary sources, principally SEBI circulars and master directions, NPCI specifications and the official support documentation published by the intermediary in question. Drafts go through a second-pair-of-eyes review and a separate compliance read before publication, and revisions are tracked against the SEBI and NPCI rule changes referenced in the methodology section.

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