Exchange Traded Fund (ETF)
An ETF is a type of investment fund that holds a basket of underlying securities — equities, bonds, or commodities — and is listed and traded on a recognised stock exchange. Unlike traditional mutual fund units transacted at end-of-day NAV, ETF units are bought and sold throughout the trading day at market prices.
How ETFs Work
An ETF is typically structured to track an underlying index (such as Nifty 50, Sensex, or Nifty Bank) or a specific asset (such as gold). The fund holds the constituent securities in the same proportion as the index. Investors require a Demat account and a trading account to purchase ETF units.
Key Metrics
- •Tracking Error: Measures how closely the ETF's performance mirrors its benchmark. Lower tracking error indicates tighter replication.
- •Expense Ratio: ETFs generally carry lower expense ratios compared to actively managed funds.
- •Bid-Ask Spread: The difference between buying and selling price on the exchange — an implicit transaction cost.
- •Liquidity: Determined by trading volume. Low-volume ETFs may have wider bid-ask spreads.
Types of ETFs in India
| Category | Example |
|---|---|
| Equity Index | Nifty 50 ETF, Sensex ETF |
| Sectoral | Bank ETF, IT ETF |
| Gold | Tracks domestic gold prices |
| Debt | Bharat Bond ETF |
| International | Nasdaq 100 ETF |
Tax Treatment
Equity ETFs held over 12 months attract LTCG tax at 12.5% on gains above ₹1,25,000. Debt and gold ETFs are taxed as per the investor's income slab under current regulations.