Exchange Traded Fund
Also written ETF · Exchange Traded Fund (ETF) · Exchange Traded Funds · Gold ETF · 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 X-B · Chapter 10: Taxation of Debt Productsintroduced here
- Series IX · Chapter 1: Introduction to the Capital Marketintroduced here
- Series V-D · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series V-B · Chapter 2: Concept and Role of a mutual fundintroduced here
- Series XVI · Chapter 2: Commodity Indicesintroduced here
- Series VIII · Chapter 2: Understanding Indexintroduced here
- Series V-A · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series II-A · Chapter 4: Characteristics of Other Securitiesintroduced 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.
- 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.
- Index fundA fund that invests in index stocks in the proportions in which they exist in the index, aiming to generate returns equivalent to the index.
- 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.
- 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.
- 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.