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LoansJagat Team

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04 Aug 2025

What Is An ETF In The Stock Market? Meaning, Types & Investment Guide

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Let’s say Riya, a 28-year-old from Pune, wanted to start investing but didn’t know where to begin. She had ₹5,000 and was curious about the stock market but found buying individual shares complicated.

Her friend suggested an ETF, something that’s low-cost and beginner-friendly. Riya chose a Nifty 50 ETF priced at ₹1,000 per unit.

Here’s what she did:

Invested ₹5,000 to buy 5 ETF units (₹1,000 each)
The Nifty index grew by 10% over a few months
Her investment grew to ₹5,500 without tracking 50 companies individually!

Isn’t that cool? With just a few clicks and a Demat account, Riya built a diversified portfolio. Let’s explore what ETFs are and how you can do this, too!

What Is an ETF?

An ETF is a fund that trades on stock exchanges and holds diversified financial assets. It combines the benefits of mutual funds and stocks, offering low-cost, flexible, diversified investments.

Let’s understand it with the help of an example:

Let’s say you want to invest ₹5,000 in the Nifty 50 index but can’t buy all 50 stocks individually. Instead, you buy 5 units of a Nifty 50 ETF priced at ₹1,000 each. This ETF tracks the index and holds all 50 stocks in the same proportion.

So, with ₹5,000, you’re indirectly invested in all 50 companies. If the Nifty 50 rises by 10%, your ETF value also goes up by around 10%, becoming ₹5,500.

This way, ETFs allow small investors to access a broad market portfolio easily and affordably.

What Are The Key Features of ETFs?

ETFs offer diversification, liquidity, transparency, and cost-effectiveness to investors. They trade like stocks and suit various strategies with tax-efficient advantages.

Key Features of ETFs:

Feature	What It Means	Example
Diversification	One ETF holds many stocks, bonds, or assets, reducing risk.	You buy 1 unit of an ETF for ₹1,000 that invests in 50 companies. If one fails, others balance the loss.
Liquidity	ETFs can be bought or sold anytime during market hours.	You purchase an ETF at ₹100 at 10:30 AM and sell it at ₹105 by 3:00 PM.
Cost-Effectiveness	ETFs have lower fees due to passive management.	A mutual fund charges 1.5% annually, but an ETF charges only 0.2%, saving ₹1,300 per ₹1,00,000 invested/year.
Transparency	ETFs disclose their holdings daily.	You can check online and see that your ETF holds 10% in Infosys, 8% in Reliance, etc., updated daily.
Flexibility	ETFs allow strategies like intraday trading, short selling, or margin trading.	Buy an ETF at ₹1,000 and sell the same day at ₹1,020. Or short-sell, expecting prices to drop.
Tax Efficiency	ETFs often generate fewer taxable capital gains than mutual funds.	If you hold an ETF for 1 year, you may pay 10% LTCG only on the actual profit, reducing the overall tax burden.

What Are The Types of ETFs?

ETF Type	What It Invests In	Example
1. Equity ETF	Shares of many companies	You spend ₹2,000 on an ETF that owns 50 big companies’ shares.
2. Bond ETF	Government or company bonds	You invest ₹5,000 and get around ₹250 every year as interest.
3. Commodity ETF	Things like gold, oil, etc.	You buy a Gold ETF at ₹600. If gold prices rise, it becomes ₹660.
4. Index ETF	Follows a stock market index	₹1,000 in a Nifty ETF grows to ₹1,080 if Nifty rises 8%.
5. Sector ETF	One industry, like tech or pharma	₹2,000 in a Pharma ETF becomes ₹2,240 if the pharma sector grows by 12%.
6. Thematic ETF	New trends like electric cars or green energy	You put ₹3,000 in an electric car ETF. If that trend grows 15%, it becomes ₹3,450.
7. Smart Beta ETF	Special rules like picking high-dividend stocks	₹1,000 in a high-dividend ETF yields ₹60 in dividends and some growth.
8. Leveraged ETF	Tries to give double or triple the return	The market goes up 5%, and this ETF goes up 10%. ₹1,000 becomes ₹1,100.
9. Inverse ETF	Makes money when the market falls	If the market falls 4%, your ETF goes up 4%. ₹1,000 becomes ₹1,040.
10. Actively Managed ETF	A fund manager picks stocks for better returns	You invest ₹10,000. If the manager does well, it grows to ₹11,400.
11. International ETF	Companies outside your country (like in the US or Europe)	₹5,000 in a US ETF becomes ₹5,600 if US stocks go up 12%.
12. Gold ETF	Digital gold investment	You buy 10 units at ₹50 = ₹500. If gold prices rise, the value becomes ₹540.

ETF vs. Mutual Funds: What’s the Difference?

Feature	ETFs (Exchange Traded Funds)	Mutual Funds
1. Trading & Pricing	Traded like stocks on stock exchanges throughout the day.	Bought/sold only at end-of-day NAV (Net Asset Value).
2. Price Fluctuation	Price changes in real time during market hours based on demand/supply.	Fixed once daily after the market closes based on the fund’s NAV.
3. Expense Ratio	Generally lower due to passive management.	It can be higher, especially for actively managed funds.
4. Management Style	Mostly passive — tracks indexes like Nifty or S&P 500.	Can be passive or actively managed by fund managers.
5. Buying Process	Requires a Demat + brokerage account.	Can be bought online or offline, often directly from the fund house.
6. Transparency	Holdings are disclosed daily.	Holdings are disclosed monthly or quarterly.
7. Minimum Investment	Price of 1 ETF unit (varies, e.g., ₹100–₹1,000+).	Usually starts at ₹500–₹1,000 via SIP or lump sum.
8. Flexibility	Allows intraday trading, stop-loss orders, margin trading, etc.	Not tradable during market hours means for long-term investing.
9. Tax Efficiency	More tax-efficient due to the in-kind creation/redemption process.	May incur higher capital gains taxes due to internal portfolio turnover.

Quick Decision Guide:

Choose ETFs If You Want	Choose Mutual Funds If You Want
Flexibility to trade anytime during market hours	A simple, long-term investment managed by professionals
Lower annual fees and passive index tracking	Actively managed funds aiming to beat the market
Real-time control over buying/selling	Easy investment without a Demat account

How to Invest in ETFs in India?

Choose a reliable stockbroker like Zerodha, HDFC Securities, or Angel One.
Open a Demat and trading account online through your chosen broker.
Complete KYC verification by submitting PAN, Aadhaar, and bank details.
Log in to your trading platform via the broker’s website or mobile app.
Research different ETFs based on index, sector, gold, or international exposure.
Select an ETF that matches your goals and risk appetite.
Search for the ETF symbol on the trading platform (e.g., NIFTYBEES, GOLDETF).
Place a buy order by choosing either a market order or a limit order.
Confirm the transaction, and the ETF units will be credited to your Demat account.
Track and manage your investment regularly and rebalance your portfolio as needed.

Conclusion

ETFs are a simple, low-cost way to start investing. You can invest in big companies, gold, or global stocks—all with just a few clicks. Like Riya, you only need a Demat account. Pick the right ETF, invest regularly, and watch your money grow. It’s safe, easy, and beginner-friendly. So go ahead, take your first step with confidence!

FAQs

Q1: What is an ETF in the stock market?
An ETF (Exchange Traded Fund) is a fund that trades like a stock and holds multiple assets.

Q2: How do I start investing in ETFs in India?
You need a Demat and trading account with a broker like Zerodha or HDFC Securities.

Q3: Are ETFs better than mutual funds for beginners?
ETFs are beginner-friendly, low-cost, and offer flexibility, while mutual funds suit passive, long-term investors.

Q4: Can I invest in gold or foreign stocks through ETFs?
Yes, there are specific ETFs for gold, the US markets, and even global themes.

Q5: How much money do I need to invest in an ETF?
You can start with the price of one ETF unit—usually between ₹100 to ₹1,000.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?

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