Exchange Traded Funds (ETFs)

An ETF is a basket of securities (like an index fund) that trades on the stock exchange throughout the day just like a regular share, via your Demat account — unlike a mutual fund, which is bought/sold once a day at the day’s closing NAV.

Yes, since ETF units settle like shares and are held in your Demat account.

The price of one unit — often as low as a few hundred rupees for a Nifty or Sensex ETF, making it one of the most accessible instruments to start with.

By default, any dividend income the scheme receives from its underlying stocks is reinvested back into the scheme, which is reflected in a gradually higher NAV/unit price over time rather than paid out to you separately. Some fund houses, however, may choose to distribute a portion of this as a payout to unit holders instead — whether a specific ETF does this is disclosed in its Scheme Information Document, so check the specific scheme if this matters to your income planning.

ETFs follow the same capital gains tax treatment as buying/selling shares or mutual fund units directly — the exact rate depends on what the ETF invests in (equity, debt, gold, etc.) and how long you hold it:

• Equity ETFs Gains held over 1 year are long-term (12.5% above ₹1.25 lakh/year exemption); under 1 year are short-term (20%).
• Gold/Debt ETFs Taxed differently — generally at your income slab rate, though the exact treatment depends on the specific fund category and current tax rules.
  Always check the ETF’s Scheme Information Document (SID) / Key Information Memorandum (KIM) for the applicable taxation clause, since rules can vary by fund type and change with tax law updates.

• Asset allocation Building a diversified portfolio (across market-cap, sector, or style) can be expensive and complex to do stock-by-stock. A single ETF gives instant exposure to a broad basket in one trade, making diversification far more accessible for both retail and institutional investors.
• Cash parking (“cash equitisation”) If you have money earmarked for equities but haven’t decided exactly where to deploy it long-term, a broad-market ETF lets you stay invested in the market meanwhile (rather than sitting in cash and missing potential upside), while you take your time on individual stock picks.
• Hedging Because ETF units can be borrowed and sold short, and trade in smaller, more flexible lot sizes than most derivative contracts, they’re a convenient way to hedge a portfolio — especially useful for smaller portfolios where a full futures/options contract size would be too large a hedge.
• Arbitrage and options strategies Traders use ETFs to arbitrage price differences between the cash market and the futures market on the same index, and as the underlying instrument for covered-option strategies.

ETF liquidity works differently from a typical stock and comes from two sources:

1. Regular secondary-market trading buying/selling ETF units on the exchange like any listed stock.
2. The in-kind creation/redemption mechanism large institutional players (“Authorised Participants”) can create new ETF units by delivering a basket of the underlying shares to the fund, or redeem units for the underlying shares, in bulk “creation unit” sizes.
   Because of this second channel, an ETF’s real liquidity is tied to the liquidity of its underlying stocks, not just how many people happen to be trading the ETF itself that day — so even a lower-volume ETF on a liquid index (like Nifty 50) generally remains easy to enter/exit at a fair price, since large players can always create/redeem against the liquid underlying basket.