An ETF (Exchange Traded Fund) is a fund that holds a basket of securities (shares, bonds or gold) and itself trades on the stock exchange like a single share. Buy one unit, and you effectively own a small slice of everything inside the basket.
How does one unit hold a whole basket?
Most ETFs are built to track an index. A Nifty 50 ETF holds the same 50 stocks, in the same proportions, as the Nifty 50 itself, if the index is new to you, start with what is a market index like Nifty 50 or Sensex. When the index rises 1%, the ETF's value rises about 1% too. The fund does not try to beat the index, only to mirror it. This is called passive investing, and it keeps running costs very low.
Lakshmi wants to invest in "the market" without picking individual companies. Instead of buying 50 different stocks, she buys units of a Nifty 50 ETF through her Rupeezy account during market hours, exactly the way she would buy a share: pick quantity, place the order, and the units land in her demat account. She can sell the same way, any time the market is open.
Beyond index ETFs, common varieties in India include gold ETFs (units backed by gold), debt/bond ETFs (baskets of bonds, like Bharat Bond), and sector ETFs (banking, IT and so on).
How is an ETF different from a regular mutual fund?
Both pool money into a basket, but they differ in how you buy, sell and pay:
| ETF | Regular mutual fund | |
|---|---|---|
| How you buy | On the exchange, via your trading account | Through the fund house (AMC), by amount |
| Price | Live market price, changes all day | One NAV, declared after the day ends |
| Needs demat account? | Yes | No |
| Minimum purchase | One unit (often a small amount) | Scheme minimum, often ₹100–₹500 |
| Cost structure | Usually very low expense ratio + brokerage/spread on trades | Expense ratio (higher for active funds); no brokerage |
| SIP support | Not built-in; you place orders yourself | Built-in SIPs |
| Fractional amounts | No, whole units only | Yes — invest exact ₹ amounts |
The practical trade-off: ETFs give you live pricing, exchange convenience and rock-bottom fund costs, but you must trade them yourself and mind the market price; mutual funds automate investing (SIPs, exact amounts) at the cost of end-of-day pricing and, for active schemes, higher fees.
One ETF-specific wrinkle: because units trade on the exchange, an ETF's market price can drift slightly from the live value of its underlying basket (its indicative NAV, or iNAV). In heavily traded ETFs the gap stays tiny; in thinly traded ones it can widen, so a limit order near iNAV is the safer habit. Tracking difference (the small lag between an ETF's return and its index's return) also varies between funds.
To follow an ETF's live price alongside your stocks, add it to your watchlist. Here's how to add Bharat Bond ETF to your watchlist; the same steps work for any ETF.
Things to keep in mind
- An ETF is only as good as its basket. A Nifty 50 ETF falls the full distance when the index falls; diversification reduces single-stock risk, not market risk.
- Check an ETF's traded volume and bid-ask spread before buying; thin ETFs can trade away from their real value.
- ETF units sit in your demat account and settle like shares.
- Compare expense ratios and tracking difference between ETFs on the same index. They are not all identical.
Read next
What are REITs and InvITs? — Two more exchange-traded instruments, for real estate and infrastructure.