Exchange Traded Fund (ETF) 

An Exchange Traded Fund (ETF) is an investment fund that holds a basket of underlying assets, such as stocks, bonds, commodities (like gold), or currencies, and is traded on stock exchanges, much like individual company shares. This means you can buy and sell units of an ETF throughout the trading day at prices that fluctuate based on market demand and supply. The primary goal of most ETFs is to track the performance of a specific index (like India's NIFTY 50 or Sensex), a particular sector (e.g., banking or IT), a commodity, or an asset class. Investing in an ETF allows you to gain exposure to all the components held within that ETF's portfolio through a single transaction, offering instant diversification.

List of Best ETFs to Invest in 2025

Types of ETFs in India:

ETFs in India can be broadly categorized based on the underlying assets they track. Understanding these types can help you choose an ETF that aligns with your investment goals:

Understanding ETF Net Asset Value (NAV): How It's Calculated and Why It Matters

While ETFs trade on exchanges at market-determined prices, their underlying value is represented by the Net Asset Value (NAV). The NAV of an ETF is calculated daily after market closing.

NAV = (Total Value of Assets - Total Value of Liabilities) / Total Number of Outstanding Shares

• Total Value of Assets: The sum of the current market value of all securities (stocks, bonds, etc.) and cash held by the ETF.
• Total Value of Liabilities: Any debts or obligations of the fund.
• Total Number of Outstanding Shares: The total number of ETF shares held by investors.

NAV Calculation

Let's say an ETF has:

• Total Assets (like stocks and cash): ₹10,00,000
• Total Liabilities (like fees owed): ₹10,000
• Total Outstanding ETF Shares held by investors: 50,000

NAV = (Assets - Liabilities) / Number of Shares
NAV = (₹10,00,000 - ₹10,000) / 50,000
NAV = ₹9,90,000 / 50,000
NAV = ₹19.80 per share

So, each ETF share has an underlying value (NAV) of ₹19.80.

An indicative NAV (iNAV) is also calculated and disseminated frequently (e.g., every 15 seconds) throughout the trading day to provide a real-time estimate of the ETF's value. This helps ETF investors gauge if the current market price is fair.

Key Features of ETFs

• Tradability: ETFs are bought and sold on stock exchanges (like NSE and BSE in India) during market hours at real-time prices, just like stocks. This offers greater flexibility compared to traditional mutual funds, which are typically priced once at the end of the trading day.
• Passive Management: Most ETFs are passively managed, meaning they aim to replicate the performance of a specific benchmark index rather than trying to outperform it. This generally results in lower fund management activity.
• Lower Expense Ratios: Due to passive management, ETFs typically have lower expense ratios (annual fund operating and management fees) compared to actively managed mutual funds. This can significantly impact your long-term returns, as a smaller portion of your investment goes towards costs.
• Transparency: The underlying holdings of an ETF are generally disclosed daily, so investors know exactly what assets their ETF owns.
• Liquidity: ETFs are generally liquid, meaning they can be easily bought and sold. However, the liquidity of an ETF can depend on its trading volume and the bid-ask spread (the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept).

Benefits of Investing in ETFs

• Cost-Effectiveness: Lower expense ratios compared to many other funds make ETFs a cost-efficient way to invest, which can maximize long-term returns.
• Diversification: Gain exposure to a wide range of asset classes, sectors, or entire markets with a single investment, reducing concentration risk. Perfect for investors who want to spread their risk without having to research and buy numerous individual stocks or bonds. For example, investing in a Sensex ETF provides diversification across 30 prominent Indian companies.
• Flexibility and Liquidity: Buy and sell ETFs on the stock exchange throughout the trading day at prevailing market prices, which leads to greater control over when you invest or divest, and the ability to react quickly to market changes.
• Transparency: The underlying holdings of an ETF are generally disclosed daily, which gives investors a clear understanding of where their money is invested. This usually attracts investors who prefer to have full visibility into their portfolio components.
• Dividends: If the underlying stocks or bonds in an ETF portfolio pay dividends or interest, these are typically distributed to ETF unit holders. This gives an investor higher earning potential, passive income in addition to capital appreciation. Attractive for investors seeking regular income from their investments, though the method and frequency can vary. 

Risks of Investing in ETFs

• Market Risk: The value of an ETF will fluctuate with the performance of its underlying index or assets. If the market or sector the ETF tracks declines, the ETF's value will also fall.
• Tracking Error: This is the difference between an ETF's returns and the returns of the benchmark index it aims to track. Factors like expense ratios, cash drag, and the efficiency of replication can cause tracking errors. Investors can check the ETF's historical tracking error before investing.
• Liquidity Risk: While many ETFs are highly liquid, some niche or less-traded ETFs might have wider bid-ask spreads, making it potentially more expensive to buy or sell shares. Checking the ETF's average daily trading volume and Assets Under Management (AUM) can help you indicate better liquidity. For less liquid ETFs, consider using limit orders instead of market orders to control your buy and sell prices.
• Deviation from NAV: The market price of an ETF can sometimes deviate from its NAV due to demand and supply dynamics, especially during volatile market conditions. Check the indicative NAV (iNAV) during trading hours to get a sense of the fair value. Significant deviations are often corrected by market arbitrage mechanisms; however, it's beneficial to be aware of this, especially when placing large orders.

How to Invest in ETFs in India

1. Define Your Investment Goals: Determine your financial objectives, risk tolerance, and investment horizon. This will help you decide which type of ETF is suitable for you (e.g., broad market exposure with a NIFTY 50 ETF, sector-specific investment, or gold investment).
2. Open a Demat and Trading Account at INDmoney: To invest in ETFs in India, you need a Demat account (to hold ETF units in electronic form) and a trading account. These are typically provided together by SEBI-registered stockbrokers, such as INDmoney.
3. Research ETFs:
   • Underlying Index/Assets: Understand what the ETF tracks (e.g., NIFTY 50, Sensex, Gold). Ensure it aligns with your investment strategy.
   • Expense Ratio: Compare the expense ratios of different ETFs tracking the same index. A lower expense ratio is generally better.
   • Tracking Error: Look for ETFs with a low tracking error, indicating they closely follow their benchmark.
   • Liquidity/Trading Volume: Higher trading volume generally means better liquidity and tighter bid-ask spreads.
   • Fund House Reputation: Consider the track record and reputation of the ETF provider or Asset Management Company (AMC).
4. Place an Order: Once you've selected an ETF, you can place a buy order through your broker's trading platform, similar to buying a stock. You can specify the quantity and price (for limit orders) or buy at the current market price.
5. Monitor Your Investments: Regularly review the performance of your ETF investments and rebalance your portfolio if necessary.

Taxation for ETFs

1. Equity ETFs

Short-Term Capital Gains (STCG): For equity ETFs where Securities Transaction Tax (STT) is paid, the STCG tax rate has increased from 15% to 20%, effective from July 23, 2024, under Section 111A of the Income Tax Act.

The Long-Term Capital Gain (LTCG) on equity ETFs exceeding ₹1.25 lakh at 12.5% without indexation is consistent with recent changes.

Securities Transaction Tax (STT): STT is a small tax paid when you buy or sell equity ETFs on a stock exchange.

2. Debt ETFs

Debt ETFs are taxed like debt mutual funds.

Holding Period for LTCG: For investments made before April 1, 2023, if held for more than 3 years, gains were LTCG and taxed at 20% with indexation. However, if these are sold on or after July 23, 2024, the tax rate is 12.5% without indexation. The holding period to qualify for LTCG has also been reduced from 36 to 24 months.

For investments made on or after April 1, 2023, gains are treated as short-term capital gains and taxed at your applicable income tax slab rate, irrespective of the holding period.Indexation benefits are not available.

3. Gold ETFs

Investments Made Before April 1, 2023:

Holding Period for LTCG: If held for more than 36 months and sold before April 1, 2025, gains qualify as LTCG and are taxed at 20% with indexation.

Post April 1, 2025: Indexation benefits are no longer available. LTCG is taxed at 12.5% without indexation.

Investments Made Between April 1, 2023, and March 31, 2025:

Tax Treatment: Gains are treated as STCG and taxed at the investor's applicable income tax slab rate, regardless of the holding period.

Investments Made On or After April 1, 2025:

Holding Period for LTCG: If held for more than 24 months, gains qualify as LTCG and are taxed at 12.5% without indexation.

STCG: If held for 24 months or less, gains are treated as STCG and taxed at the investor's applicable income tax slab rate.

ETFs vs. Other Investments: Comparing Index Funds, Actively Managed Mutual Funds, and Direct Equity

• Index Funds: Index funds are mutual funds that also passively track a specific market index, similar to index ETFs. The main difference is that index fund units are bought and sold based on the end-of-day NAV, directly from the fund house, whereas ETFs trade on the stock exchange throughout the day. Both typically have low expense ratios.
• Actively Managed Mutual Funds: Unlike passively managed ETFs and index funds, actively managed mutual funds have fund managers who actively select stocks and other securities intending to outperform a benchmark index. These funds generally have higher expense ratios due to the active management involved.
• Direct Equity Investing: Investing directly in shares of individual companies (e.g., Reliance, HDFC Bank). This requires more research and carries higher company-specific risk compared to the diversification offered by ETFs.

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