Exchange-Traded Funds in India

Exchange-Traded Funds (ETFs) in India are exchange-listed passive-investment vehicles that track specific indices (equity, debt, commodity) and are traded on Indian stock exchanges (NSE and BSE) like individual stocks. ETFs combine the structural features of index mutual funds (passive tracking of an underlying index) with the operational features of exchange-listed stocks (real-time market pricing, intraday trading, demat-mode holding). The Indian ETF market emerged in 2001 with the launch of Benchmark Mutual Fund’s Nifty BeES (the first Indian ETF) and has grown substantially through the 2010s and 2020s, reflecting global passive-investing trends and increasing Indian retail-investor interest.

ETFs in India are governed by the SEBI (Mutual Funds) Regulations, 1996 as a sub-category of mutual fund schemes, with additional listing requirements under the exchange rules of NSE and BSE. The principal Indian ETF segments include equity ETFs (tracking Nifty 50, Sensex, sector indices), debt ETFs, gold ETFs, international ETFs (tracking foreign indices subject to SEBI overseas-allocation limits), and smart-beta ETFs (tracking factor-weighted indices like quality, value, low-volatility). Major Indian ETF operators include Nippon India (formerly Reliance), ICICI Prudential, SBI, HDFC, Motilal Oswal, and Mirae Asset.

Indian ETFs operate in close conjunction with the index fund ecosystem; both share the passive-investing philosophy but differ in trading mechanics. The PPFAS Mutual Fund AMC, which focuses exclusively on actively-managed schemes, does not currently offer ETFs but its Annual Letters periodically discuss the active-versus-passive debate. PPFCF’s overseas allocation includes direct equity in US-listed companies; some Indian retail investors use international ETFs (Nasdaq 100, S&P 500) as complementary or alternative exposure.

Origin and history

2001 launch of Nifty BeES

The first Indian ETF was Nifty BeES (Nifty Benchmark Exchange Traded Scheme), launched by Benchmark Mutual Fund on 8 January 2002 (NFO closing in early 2002). Nifty BeES tracked the Nifty 50 and was the first Indian ETF listed on the NSE. The launch:

• Brought passive-investing operational features (intraday trading, demat-mode holding) to Indian investors.
• Was modelled on the US SPDR S&P 500 ETF (SPY, launched 1993).
• Achieved early-mover advantage in the Indian ETF segment.

Benchmark Mutual Fund was acquired by Goldman Sachs in 2011, and the Nifty BeES product transferred to Nippon India Mutual Fund following further acquisitions.

2000s expansion

Through the 2000s, additional Indian ETFs were launched:

• Junior Nifty BeES (Nifty Next 50 ETF): Mid-large-cap exposure.
• Bank BeES (Nifty Bank ETF): Banking sector.
• Liquid BeES: Money-market ETF.
• Gold BeES: Gold ETF launched in 2007.

These products built the foundational ETF infrastructure.

2010s diversification

The 2010s saw:

• International ETFs: Motilal Oswal launched Nasdaq 100 ETF (FoF structure).
• Sector ETFs: Pharma, IT, FMCG, Energy ETFs.
• Smart-beta ETFs: Quality, low-volatility, dividend-yield, value factor ETFs.
• Debt ETFs: Bharat Bond ETF (2019) and others.
• EPFO investments: The Employees’ Provident Fund Organisation began ETF investments in 2015, providing institutional demand.

2020s growth

The 2020s have seen:

• Substantial AUM growth: Indian ETF AUM grew from approximately Rs 2 lakh crore in 2020 to several lakh crores by 2026.
• Continued sector and theme expansion.
• Increased retail uptake: Driven by Zerodha Coin and other aggregator platforms.
• International ETF impact from SEBI overseas cap: Some international ETFs closed to new subscriptions following the February 2022 SEBI suspension.

Modern operational scale

By 2026:

• Indian ETF AUM: Several lakh crores.
• Approximately 200+ ETFs listed on NSE and BSE.
• Major operators: Nippon India, ICICI Prudential, SBI, HDFC, Mirae Asset, Motilal Oswal.

ETF structure and operations

Authorised Participants (APs)

Indian ETFs operate through the Authorised Participant (AP) framework:

• APs are large institutional intermediaries (typically broker-dealers, banks, market makers) authorised by the ETF AMC.
• Creation units: APs buy or sell ETF units in large blocks (typically several thousand units) directly with the AMC.
• Arbitrage role: APs arbitrage between the ETF’s market price and its NAV, keeping the two aligned.

The AP framework is the operational backbone of ETF liquidity.

Creation and redemption

ETF unit creation and redemption flow:

• Creation: AP delivers a basket of underlying securities (matching the index) to the AMC; AMC issues ETF units to the AP.
• Redemption: AP returns ETF units to the AMC; AMC delivers the underlying basket back to the AP.

This in-kind creation-redemption mechanism is operationally distinctive from mutual funds (which transact in cash). It enables:

• Tax efficiency (the AMC does not realise capital gains on portfolio rebalancing).
• Reduced trading costs.
• Tighter NAV-versus-market-price alignment.

Market trading

ETF investors typically:

• Buy and sell on exchange: Through brokers, at market prices, throughout the trading day.
• Demat-mode holding: ETF units are held in the investor’s demat account (typically CDSL).
• Real-time pricing: ETF prices update in real-time during market hours.

iNAV (Intraday NAV)

Some ETFs publish an iNAV (intraday NAV):

• Calculated in real-time based on underlying-basket prices.
• Helps investors and APs identify arbitrage opportunities.
• Provided typically every 15 seconds.

Liquidity considerations

ETF liquidity has two layers:

• On-exchange liquidity: Market-maker quotes and natural buyer-seller flow.
• AP-mediated liquidity: For large orders, APs can create or redeem units, providing deeper liquidity than market quotes alone might suggest.

The combination means well-managed ETFs typically have tight bid-ask spreads even when on-exchange volume is modest.

ETF categories

Equity ETFs

The largest category. Sub-categories:

• Broad-market ETFs: Nifty 50, Nifty 100, Nifty 500, Sensex, Nifty Next 50.
• Sector ETFs: Bank Nifty, IT Nifty, Pharma Nifty, FMCG Nifty, etc.
• Smart-beta ETFs: Nifty 50 Equal Weight, Nifty Quality 30, Nifty Low Volatility 30, Nifty 100 Quality 30, Nifty 200 Momentum 30.

Debt ETFs

• Bharat Bond ETF: Series of ETFs tracking PSU bonds with various maturities. The first Bharat Bond ETF launched in December 2019 (3-year and 10-year maturities) was a landmark debt-ETF product.
• Various other debt ETFs.

Gold ETFs

Gold ETFs hold physical gold (or gold-equivalent claims) and trade on the exchange. Major Indian gold ETFs:

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

Gold ETFs provide exposure to gold prices without the operational complexity of physical gold ownership.

Silver ETFs

Following SEBI permission in 2021, silver ETFs emerged:

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

International ETFs (Fund-of-Funds)

International ETFs are typically structured as FoFs investing in underlying international ETFs:

• Motilal Oswal Nasdaq 100 ETF.
• Mirae Asset NYSE FANG+ ETF.
• Various S&P 500 ETF FoFs.

These are subject to SEBI overseas-investment-limit framework; some have been closed to new subscriptions following the 2022 overseas-cap suspension.

Liquid ETFs

Liquid ETFs invest in money-market instruments and offer cash-equivalent exposure:

• Nippon India Liquid BeES.

Comparison with index funds

Both vehicles serve similar passive-investing goals; choice depends on operational preference and individual circumstances.

Major Indian ETF operators

Nippon India Mutual Fund

The largest ETF operator in India, having acquired the Benchmark Mutual Fund product suite (Nifty BeES, Bank BeES, Gold BeES, etc.) through ownership transfers. Nippon India offers comprehensive ETF coverage.

ICICI Prudential AMC

Wide ETF product range including domestic indices, international ETFs, silver ETFs, smart-beta ETFs.

SBI Funds Management

Large ETF presence, particularly notable as SBI ETFs are widely held by the EPFO (Employees’ Provident Fund Organisation) under the EPFO’s mandatory ETF allocation framework.

HDFC Mutual Fund

Comprehensive ETF suite covering domestic and gold ETFs.

Motilal Oswal AMC

Distinctive for the Nasdaq 100 ETF and FANG+ ETFs (US-tech-focused).

Mirae Asset Mutual Fund

Strong international-ETF offerings including NYSE FANG+ ETF.

Aditya Birla Sun Life Mutual Fund

Wide ETF product range.

Tax framework

Equity ETFs

Equity-oriented ETFs (over 65 per cent Indian equity exposure):

• Section 112A: 12.5 per cent LTCG above Rs 1.25 lakh annual exemption (Finance Act 2024).
• Section 111A: 20 per cent STCG for holdings under 12 months.

Debt ETFs

Post-Finance-Act-2023:

• Investments made on or after 1 April 2023: Slab-rate STCG regardless of holding period.
• Older investments: Pre-2023 indexation-based LTCG framework.

Gold ETFs

Gold ETFs are not equity-oriented:

• Post-Finance-Act-2023 framework: Slab-rate STCG for investments made on or after 1 April 2023.
• Older investments: Prior framework with 36-month holding for LTCG.

International ETFs

International FoF-structured ETFs are taxed as debt funds:

• Post-Finance-Act-2023: Slab-rate STCG.

The international-ETF tax framework is less favourable for high-bracket investors compared with direct equity in US stocks (which would receive Section 112A on long-term holdings, subject to interpretation of overseas-listed shares).

EPFO and institutional ETF investing

EPFO ETF allocation

The Employees’ Provident Fund Organisation (EPFO) began ETF investments in 2015 under a mandate to allocate a percentage of incremental investment to equity through ETFs. The EPFO:

• Invests through SBI ETFs and other approved ETFs.
• Has accumulated substantial ETF AUM through 2026.
• Represents the largest single institutional ETF investor in India.

Insurance and pension fund ETF investing

Various insurance and pension funds invest in ETFs under their respective regulatory frameworks (IRDAI for insurance, PFRDA for pension).

Retail uptake

Retail investing in Indian ETFs has grown through:

• Zerodha Coin and similar platforms: Lowering operational friction.
• Direct-plan adoption: Reducing TER awareness barriers.
• Smart-beta and international ETF interest: Diversification appetite.

Major Indian ETFs by AUM

(Approximate ranking; AUM positions fluctuate)

• SBI Nifty 50 ETF: Largest ETF by AUM, partly EPFO-driven.
• Nippon India ETF Nifty BeES: Long-tenure flagship.
• HDFC Nifty 50 ETF.
• ICICI Prudential Nifty 50 ETF.
• Various gold ETFs: Substantial AUM driven by gold’s defensive role.
• Bharat Bond ETF: Substantial debt-ETF AUM.

Criticism and debates

Tracking error in less-liquid Indian ETFs

Some Indian ETFs, particularly those tracking sector or thematic indices, have non-trivial tracking error due to:

• Lower trading volume affecting AP arbitrage efficiency.
• Index-constituent illiquidity.
• TER drag.

International ETF availability constraints

SEBI’s 2022 overseas-investment-cap suspension affected international ETFs significantly. Some were closed to new subscriptions, limiting retail-investor access to Nasdaq 100, S&P 500, and similar.

Smart-beta ETF effectiveness

The proliferation of smart-beta ETFs (quality, value, low-volatility, momentum) has prompted debate on whether the factor premiums persist in Indian markets and justify the higher TER versus broad-market ETFs.

EPFO ETF allocation impact

The EPFO’s substantial ETF buying creates artificial demand pressure on certain ETFs and underlying indices. The market-microstructure impact of EPFO flows is periodically discussed.

See also

• Index funds in India
• Zerodha Coin
• Nifty 500 TRI
• Nifty Bank TRI
• Bank Nifty
• PPFAS Mutual Fund
• Parag Parikh Flexi Cap Fund
• International diversification PPFAS
• SEBI MF overseas investment cap
• Mutual fund industry India
• Mutual fund TER India
• LTCG on equity mutual fund (Section 112A)
• STCG on equity mutual fund (Section 111A)
• Capital gains tax in India
• How to compute slab-rate tax on PPFAS Liquid Fund
• Direct plan adoption in India
• Nasdaq
• New York Stock Exchange
• Regular vs direct plan mutual fund

External references

• AMFI Industry Data
• SEBI Master Circular for Mutual Funds, 2024
• NSE Indices
• Nippon India Mutual Fund ETF offerings
• Motilal Oswal AMC
• Bharat Bond ETF

References

1. SEBI (Mutual Funds) Regulations, 1996.
2. SEBI Master Circular for Mutual Funds, 22 May 2024.
3. SEBI ETF regulatory framework documentation.
4. NSE Indices methodology documentation.
5. Benchmark Mutual Fund Nifty BeES original prospectus (2001-2002).
6. Bharat Bond ETF prospectus (2019).
7. AMFI Industry Data on Indian ETF AUM (multi-year).
8. Nippon India Mutual Fund ETF documentation.
9. ICICI Prudential AMC ETF documentation.
10. Finance Act, 2024 (Section 112A/111A framework).
11. Finance Act, 2023 (debt-MF taxation amendment).
12. SEBI Circular on Indian mutual fund overseas-equity allocation.
13. PPFAS Mutual Fund Annual Letters and factsheets (active-vs-passive references).
14. EPFO investment policy documentation.
15. CFA Institute Investment Foundations on ETFs.