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What is an ETF and how is it different from a mutual fund
An ETF (Exchange Traded Fund) is a fund that tracks an index or asset and trades on a stock exchange throughout the day like a stock, unlike a mutual fund whose NAV is fixed once a day. You need a demat account to hold ETFs.
In one line
An ETF (Exchange Traded Fund) is a basket of securities (stocks, bonds, gold, or other assets) that tracks an index or theme and is listed on a stock exchange where its price fluctuates live during market hours, unlike a regular mutual fund that has a single end-of-day NAV, and you buy and sell ETF units at market price through your demat and trading account just as you would buy a share.
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How ETFs trade and why that matters
A mutual fund is priced once a day at the closing NAV. When you place a purchase order, you get units at the NAV calculated after market close, regardless of whether you placed the order at 9 AM or 2 PM. ETFs work differently. They are listed on the NSE or BSE and trade continuously through market hours, just like a stock. The price you pay is the market price at the moment you transact, which fluctuates around the ETF's underlying NAV through the day.
To hold ETF units you need a demat account, because the units are held in electronic form like shares. To invest in a regular mutual fund you need only a KYC-compliant investment account (via the AMC, MFU, or a distributor platform). This demat requirement is the main friction point for first-time ETF investors who may not have a demat account set up.
Types of ETFs in India
The Indian ETF market is largest in equity index ETFs. The Nifty 50 ETF, the Nifty Next 50 ETF, and the Nifty 100 ETF are the most liquid. Beyond equity, gold ETFs have been popular for years as a way to hold gold without physical form or making charges, and sovereign gold bonds have a similar tax structure. Debt ETFs tracking indices of government securities exist as well, though liquidity in debt ETFs is thinner than in equity ETFs.
International ETFs listed in India track overseas indices (US, global, and emerging markets) and give rupee-based investors access to global equities without a foreign brokerage account. These are equity-oriented for tax purposes and are taxed as equity mutual funds, which is an advantage over certain other international fund structures.
ETF vs index fund: the practical comparison
Both an ETF and an index fund that track the Nifty 50 hold the same 50 stocks in the same proportions. The key differences are transactional. An ETF can be bought and sold at live market prices, making it useful for tactical trades or for building a position in parts through the day. An index mutual fund can be bought at end-of-day NAV via SIP, which most retail investors find simpler for regular investing.
ETFs can also trade at a premium or discount to their NAV if liquidity is thin. Liquid ETFs like the Nifty 50 and gold ETFs have active market makers keeping the spread tight, but smaller or sector ETFs can have gaps between the market price and the underlying value, which is a real cost to the buyer or seller. For a long-term SIP investor, the index mutual fund route is typically simpler. For an investor who already has a demat account and wants intraday flexibility or wants to invest in a theme not available as a regular mutual fund, an ETF is the right tool.
FAQ4 reader questions · AEO-eligible
Common questions on what is an etf.
Is an ETF better than a mutual fund?
Neither is universally better. ETFs offer intraday trading, often lower expense ratios, and demat-based holding. Mutual funds offer simpler SIP investing without a demat account and end-of-day NAV pricing. The right choice depends on your investment style and account setup.
Do I need a demat account to buy an ETF?
Yes. ETF units are held in a demat account like shares. You also need a trading account to place buy and sell orders on the exchange. Mutual funds in regular or direct plan do not require a demat account.
How are ETFs taxed in India?
Equity ETFs (tracking Indian equity indices) are taxed the same as equity mutual funds: LTCG at 12.5% above the 1.25 lakh exemption for units held more than 12 months, and STCG at 20% for 12 months or less. Gold ETFs are taxed as per the debt/other asset rules.
What is the difference between ETF NAV and market price?
An ETF's NAV is the per-unit value of its underlying portfolio, calculated by the AMC. The market price is what buyers and sellers agree to on the exchange. In liquid ETFs the two are very close. In illiquid ETFs there can be a premium or discount to NAV, which is a hidden cost for buyers and sellers.
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