What are ETFs and how to invest in them

What is an Exchange-Traded Fund (ETF)?

ETFs are baskets of assets that trade on an exchange, much like an individual stock does. These baskets may track a wide range of indices/commodities such as the Nifty 50 or Gold/Silver etc.

You can buy and sell an ETF anytime, just like a stock. Since ETFs trade on stock exchanges exactly like stocks, you cannot invest in them without the following:

• A Demat Account:
  • Purpose: Storage.
  • Since ETF units are held in electronic form, you must have a Dematerialized (Demat) account. This acts like a digital vault where your ETF units are stored once you buy them.
• A Trading Account:
  • Purpose: Transaction.
  • This account interfaces with the stock exchange to execute your buy and sell orders. Most brokers open both a Demat and Trading account simultaneously.
• KYC Compliance:
  • You must complete your Know Your Customer (KYC) formalities with a registered stockbroker to open these accounts.

Types of ETFs in India

While ETFs are available across a range of indices, commodities and other assets, ETFs have different underlying asset classes:

Let’s take a closer look at the different types of exchange-traded funds (ETFs) in India:

• Equity ETFs: Equity ETFs allow exposure to the equity markets in the same proportion of the Index it tracks. They have characteristics of a stock as they are listed on a stock exchange and can be bought and sold on the exchange during the trading hours.Imagine equity ETFs as a blend of stocks and equity mutual funds. Investors can buy or sell these funds in real-time at market prices, making them quite flexible.  
• Commodity ETFs: They are used for actually tracking the price of commodities or a basket of commodities. In India, we have gold and silver ETFs. They track the prices of physical gold and silver respectively, and their value can change throughout the day based on the demand and supply of these precious metals in the market. 
• Debt ETFs: These funds replicate an underlying bond index comprising securities like G-Secs, State Development Loans (SDLs), Government Companies’ Bonds, Money Market instruments, etc. Investing in these ETFs may help investors reduce the portfolio’s volatility by diversifying investment into these securities. 
• International ETFs: If an investor is eyeing global opportunities, international ETFs may be one of the options. These replicate indices from foreign markets. Please note that the above list of ETFs is not exhaustive. These basic types of ETFs may be a mechanism to get started on the passive investment journey. It is advised to understand the risks of each kind of ETFs before making any investment decision.

Investors interested in exploring ETFs for their investment portfolio may visit ^[1]Zerodha Fund House to view the ETF offerings.

Factors to Consider Before Investing in ETFs:

Before you begin your ETF investments, it may be considered essential to weigh the following factors: 

• Investment Objectives: It helps to have a clear understanding of investment objectives, risk tolerance, and investment horizon to select ETFs that align the best with an investor’s financial aspirations.
• Expense Ratios: It is important to pay close attention to the expense ratios of different ETFs. 
• Liquidity: It is important to ensure that the ETFs have sufficient trading activity. This may facilitate smooth transactions when buying or selling units of the ETF. 
• Tax Implications: Understanding the potential tax implications associated with ETF investments is critical to make informed decisions. Tax implications will also depend on the underlying assets of the ETF.
• Tracking Error: Tracking error indicates how closely the fund return is tracking the benchmark Index return. A lower tracking error indicates fund closely tracking benchmark index and higher tracking error indicates fund returns with higher deviation from benchmark index returns. 
• Research and Due Diligence: Conducting a thorough research on the ETFs that an investor plans to invest in is very important. This can include analyzing their portfolio holdings, past performance and other factors.

​​Please note that the above list of factors is not exhaustive. There may be a whole bunch of other factors that come into play before making an investment decision. 

Conclusion

Exchange-Traded Funds (ETFs) offer investors an accessible way to trade/invest on stock exchanges and gain exposure to a diverse range of assets, including stocks, bonds, and commodities. They can be a valuable tool for diversification, blending the benefits of pooled investing with the real-time trading flexibility of stocks.

Before investing, it's essential to align your choices with your financial goals and risk tolerance and thoroughly research the specific ETF to understand its objectives, holdings, and associated risks. 

[1]: Please note that the details provided here represent current offerings and are subject to change. This information should not be viewed as financial advice or a recommendation to invest in Zerodha Mutual Fund schemes. Investors are encouraged to consult with their financial advisor for personalized investment advice.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully

Please note that this article or document has been prepared on the basis of internal data/ publicly available information and other sources believed to be reliable. The information contained in this article or document is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party in any manner. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article or document.

Disclaimer: The mention of any asset class or type of investment is for illustrative purposes only and does not constitute a recommendation.

Published on Nov 21st, 2025