Exchange Traded Fund
Also written ETF · Exchange Traded Fund (ETF) · Exchange Traded Funds · Silver ETF
A mutual fund scheme whose units are listed and traded on a stock exchange like a share, so you transact at live prices through the day instead of at one end-of-day NAV.
In plain language
An ordinary open-ended fund has exactly one price a day. Whatever time you place your order, you get the NAV struck at the close.
An ETF removes that. Its units are listed, they trade on the exchange from 9:15 to 3:30 like any share, and there is a live bid and offer all day. The scheme itself is almost always passive — it replicates an index, or holds gold or silver — so there is very little for a fund manager to do, and the expense ratio is correspondingly small.
The trade-off is that you now have two prices to think about, not one: the NAV, which is what a unit is worth, and the market price, which is what somebody is willing to pay for it right now. They are usually close. They are not the same number.
How it works
Three rules from the SEBI categorisation and operating framework do most of the work:
- An index fund or ETF must hold at least 95% of total assets in the securities of the index it tracks. That is what makes the tracking tight.
- The total expense ratio of an index fund or ETF, including investment and advisory fees, cannot exceed 0.90% of daily net assets — against slabs starting at 2.10% for an actively managed equity scheme.
- ETF units are compulsorily held in demat form, because only demat securities can be traded on an exchange, and ETFs are compulsorily listed on at least one stock exchange.
So an ETF needs a demat account and a broker. That is the price of intraday dealing.
The formula
Premium / discount to NAV (%) = (Market price − NAV) ÷ NAV × 100
Positive is a premium — you paid more than the units are worth. Negative is a discount.
A worked example
A Nifty 50 ETF closes the day at an NAV of Rs 245.60 a unit. During the session it traded between Rs 244.90 and Rs 247.10, and you bought 1,000 units at Rs 246.85.
Premium paid = (246.85 − 245.60) ÷ 245.60 = +0.51%
Rupee cost of the premium = 1,000 × Rs 1.25 = Rs 1,250
You own Rs 2,45,600 of index exposure and paid Rs 2,46,850 for it.
Now set that against the running cost. Compare holding Rs 5,00,000 for five years in the ETF at a TER of 0.20% against an actively managed equity scheme of Rs 2,000 crore, whose base expense limit under the slabs works out to about 1.76%:
| ETF at 0.20% | Active scheme at ~1.76% | |
|---|---|---|
| Cost in year 1 | Rs 1,000 | Rs 8,800 |
| Cost over 5 years (on a flat Rs 5 lakh) | Rs 5,000 | Rs 44,000 |
The 0.51% you overpaid on entry is recovered in about four months of the expense-ratio difference. The lesson runs both ways: a wide premium matters far less than the TER over a long holding, but on a short holding or a thinly traded ETF it is the dominant cost.
Why NISM asks about it
Box 2.1 of Chapter 2 (Concept and Role of a Mutual Fund) introduces ETFs as the answer to the poor liquidity and NAV discounts of listed close-ended schemes. Chapter 3 gives the demat and listing requirements, Chapter 5 the categorisation rule (95% of assets in the index), and Chapter 7 the 0.90% expense ceiling. Expect questions on why an ETF price can differ from its NAV, on the demat requirement, and on which TER ceiling applies to an index fund or ETF.
Common exam traps
- Market price is not NAV. Only an open-ended non-listed scheme transacts at NAV. An ETF transacts at whatever the exchange quotes, which can be at a premium or a discount.
- The 0.90% ceiling is not the same as the fund-of-funds ceiling. A fund of funds investing in liquid schemes, index funds and ETFs has its own 0.90% ceiling including the weighted average TER of the underlying schemes — a different calculation.
- An ETF is a mutual fund scheme, not a share. It is governed by the MF Regulations, not by listing rules for companies.
- You need a demat account and a broker. An investor without one cannot buy an ETF, however small the expense ratio — which is exactly what the index fund route is for.
- Gold ETFs and Silver ETFs are ETFs by structure but track a commodity price, not an equity index, so the 95%-of-index rule is replaced by their own investment norms.
- The workbook warns that intraday prices "might fluctuate quite a bit" — liquidity, not NAV, decides what you actually pay.
Where this is taught
- Series VIII · Chapter 2: Understanding Indexintroduced here
- Series XVI · Chapter 2: Commodity Indicesintroduced here
- Series IX · Chapter 1: Introduction to the Capital Marketintroduced here
- Series II-A · Chapter 4: Characteristics of Other Securitiesintroduced here
- Series X-B · Chapter 10: Taxation of Debt Productsintroduced here
- Series V-D · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series V-A · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series V-B · Chapter 2: Concept and Role of a mutual fundintroduced here
- Series X-A · Chapter 11: Mutual Fundintroduced here
- Series V-D · Chapter 14: Understanding Index
Related terms
- Net Asset ValueThe net assets of a mutual fund scheme divided by the number of units outstanding — what one unit of the scheme is worth on a given day, after every liability except the unitholders' own.
- Base Expense RatioThe management-and-administration slice of a scheme's cost, capped by the SEBI slabs — the first and largest of the four components that add up to Total Expense Ratio.
- Index fundsA passive open ended scheme that replicates or tracks a specific index, investing at least 95 percent of total assets in that index's securities, bought and redeemed from the fund rather than on an exchange.
- Total Expense RatioThe all-in annual cost of a mutual fund scheme as a percentage of daily net assets — the base expense ratio plus brokerage, transaction cost and statutory levies — charged to the scheme, not billed to the investor.
- Tracking errorThe gap between the return of a passive fund and the return of the index it is trying to replicate — the measure of how faithfully an index fund or ETF does its one job.
- Traditional investmentInvestment in financial securities — listed stocks and bonds, general mutual fund units and ETFs — whose shared feature is liquidity; distinct from savings such as bank deposits or ornamental gold.
- SamplingAn indexing technique that tracks an index without holding all of it: some constituents are replaced by similar stocks, so the portfolio matches the index's risk and return rather than its exact list.
- Gold Sector FundA scheme holding the shares of gold mining and gold processing companies, so its returns follow those companies' profits rather than the price of gold, unlike a Gold ETF.
- Real Estate Investment TrustA SEBI-registered trust that pools investors' money into commercial real estate and lists its units on a stock exchange, so rent-yielding property can be bought in small lots and sold in a day.
- Pass-through vehicleThe structural fact that a mutual fund passes the risks and returns of its portfolio straight to unitholders, keeping nothing and promising nothing — which is why it is taxed once and cannot guarantee a return.
- Focused FundAn open-ended equity scheme holding at most 30 stocks, with at least 80% in equity, that must state where it focuses (multi, large, mid or small cap). Riskier than a diversified fund, less than a sector fund.
- Sector fundAn open-ended equity scheme investing at least 80% in one sector, such as banking or pharma. The riskiest step on the diversification ladder; best used tactically as a satellite holding.
- Balanced Hybrid FundAn open-ended hybrid scheme with 40% to 60% in equity and 40% to 60% in debt, and no arbitrage allowed. It sits below the aggressive hybrid fund on the workbook's risk ladder.
- Closed-end discountThe gap by which units of a listed close-ended (or interval) scheme trade below their NAV on the stock exchange. The workbook says there is no limit to it; it tends to narrow as maturity approaches.
- Base expense limitsThe full set of SEBI ceilings on a scheme's base expense ratio, which differ by scheme type — open-ended equity and debt, index funds and ETFs, fund of funds, and close-ended schemes.
- International equity fundA mutual fund scheme investing in shares listed outside India, giving an investor both an equity-market exposure and a currency exposure to the rupee's movement against the foreign currency.
- Specialized Investment FundA mutual fund product line introduced by SEBI in 2024 for sophisticated strategies, with a minimum investment of Rs 10 lakh across all of an AMC's strategies — sitting between mutual funds and PMS.
- Equity-oriented fundA fund that puts at least 65% of its proceeds into listed domestic equity shares — the tax definition that unlocks the 12.5% long-term rate and the Rs 1,25,000 annual exemption.
- Stock Lending and BorrowingA screen-based scheme under which an investor lends securities to a borrower through an Authorized Intermediary for a fee — and, under section 47(xv), it is not a transfer.
- ETF cost structureETFs carry a lower ongoing management cost than an equivalent index fund, but add brokerage, demat charges and the buy-sell quote spread on every trade — costs an index fund does not have.
- ETF liquidity in IndiaBarring a handful of exceptions, ETF trading volumes on Indian exchanges are thin, with wide buy-sell spreads and quoted prices that can drift well away from the underlying NAV.
- Ticket sizeThe minimum amount an investment requires — from as little as Rs 50 or Rs 100 in some avenues to more than Rs 1 lakh or even Rs 1 crore in others.
- Passive fundA scheme that invests according to a specified index, holding its shares in the index's own weights, so it mirrors the index instead of trying to beat the market — and costs little to run.
- Smart Beta FundAn extension of index funds and ETFs that changes how the index is weighted — equal weights or other parameters instead of market capitalisation — to improve returns, diversify more and reduce risk.
- Sovereign Gold BondA Government of India bond denominated in grams of gold, with an 8-year tenor, paying 2.5% a year over and above gold price appreciation. Discontinued from FY 2024-25.
- MF LiteA lighter SEBI regulatory framework, introduced in December 2024, for mutual funds that hold only passively managed products — index funds, ETFs, fund of funds or other schemes SEBI specifies.
- Gold ETFAn exchange-traded fund tracking domestic gold prices, backed unit-for-unit by physical gold of 99.5% purity or gold receipts, traded on the stock exchange like a share rather than held as jewellery.
- Smart betaIndex-based investing that deviates from traditional market-cap weighting to emphasise factor exposure such as value, momentum, quality or low volatility. Sits between active and passive.
- Index ETFA mutual fund scheme that invests in securities in the same proportion as an index of securities and lists on an exchange; it is taxed exactly like a listed equity oriented fund.
- Indicative NAVThe per-unit NAV of an ETF worked out from the current market value of its portfolio during trading hours, disclosed continuously on the exchanges where its units are listed and traded.