In 2026, the landscape of Indian wealth management is shifting. While traditional mutual funds have long been a household name, a cost-efficient alternative is gaining popularity among investors. Whether you are scrolling through your trading app or chatting with your wealth manager, you have likely heard of Exchange Traded Funds (ETFs).
- What Are Exchange Traded Funds?
- How Do Exchange Traded Funds Work?
- Key Features at a Glance
- Types of Exchange Traded Funds in India
- 1. Index Based ETFs
- 2. Asset Class Based ETFs
- 3. Global ETFs
- Returns from Exchange Traded Funds
- Taxation of ETFs in India
- Benefits of Exchange Traded Funds
- Risks of Exchange Traded Funds
- How to Invest in Exchange Traded Funds on Paytm Money
- Important Factors to Consider Before Investing
- Are Exchange Traded Funds Suitable for You?
- Conclusion
- FAQs
Indian investors are increasingly turning to Exchange Traded Funds (ETFs) for their affordability and diversification. Unlike traditional actively managed mutual funds or stocks, exchange traded funds are passively managed, highly liquid, and come with minimal fees.
If you have ever wondered how to gain exposure to the top 50 companies in India or the global tech giants of the Nasdaq with just a few clicks, this guide is for you.
What Are Exchange Traded Funds?
An exchange traded fund or ETF is a market linked investment that tracks a specific index, sector, commodity, or asset class. For example, an ETF tracking the Nifty 50 will invest in the same 50 companies in the same proportion as the index. The goal is not to outperform the market but to replicate its performance.
Unlike traditional mutual funds, exchange traded funds:
- Are listed on stock exchanges
- Trade in real time during market hours
- Have prices that change throughout the day
- Are generally passively managed
This passive structure usually leads to lower costs compared to actively managed funds.
How Do Exchange Traded Funds Work?
The structure of exchange traded funds is straightforward.
- The ETF provider selects an underlying index or asset, such as equities, gold, or government bonds.
- A basket of securities is created to mirror that index.
- Units of the ETF are listed on the stock exchange.
- Investors buy and sell these units through their trading accounts.
The price of an ETF moves based on supply and demand in the market, as well as the value of its underlying assets.
Key Features at a Glance
| Feature | Exchange Traded Funds | Details |
|---|---|---|
| Trading | Real time on stock exchanges | Bought and sold like individual stocks during market hours. |
| Pricing | Fluctuates during market hours | Prices change constantly based on supply, demand, and NAV. |
| Management Style | Passive in most cases | Designed to track a specific index like Nifty 50 or Sensex. |
| Cost | Lower expense ratios | Generally cheaper than actively managed mutual funds. |
| Ownership | Exposure to underlying stocks | Units represent a basket of stocks, not direct single stock ownership. |
Types of Exchange Traded Funds in India
1. Index Based ETFs
| ETF Type | Description |
|---|---|
| Index ETFs | Track indices such as Nifty 50 or Sensex |
| Thematic ETFs | Focus on specific themes like banking or technology |
| Style ETFs | Based on investing styles such as value or small cap |
| Inverse ETFs | Designed to benefit when markets decline |
| Leveraged ETFs | Aim to amplify returns of an index |
(Source: DBS Bank)
2. Asset Class Based ETFs
| ETF Type | Description |
|---|---|
| Equity ETFs | Provide exposure to shares across sectors |
| Fixed Income ETFs | Invest in government or corporate bonds |
| Bond ETFs | Focus specifically on bond instruments |
| Commodity ETFs | Track commodities such as gold, silver |
(Source: DBS Bank)
3. Global ETFs
| ETF Type | Description |
|---|---|
| International ETFs | Track global indices |
| Foreign Market ETFs | Provide exposure to markets such as Nasdaq 100 or S&P 500 |
This variety allows investors to diversify across geographies and asset classes using exchange traded funds.
Returns from Exchange Traded Funds
The returns from exchange traded funds depend entirely on the performance of the underlying index or asset.
For example:
- An equity ETF tracking a broad market index can deliver returns similar to the overall stock market.
- A gold ETF will reflect changes in gold prices.
- A bond ETF will generate returns based on interest income and bond price movement.
Since most exchange traded funds are passively managed, they do not aim to beat the market. Instead, they aim to match it. To understand the potential of Exchange Traded Funds, it helps to look at how different markets and asset classes performed in 2025. These numbers highlight how ETFs tracking various indices and commodities could have delivered strong gains.
Across global markets, several indices posted impressive gains:
- South Korea’s Kospi surged nearly 76%
- Japan’s Nikkei 225 rose over 25%
- Hong Kong’s Hang Seng Index climbed almost 30%
- China’s Shanghai Composite gained more than 16%
On Wall Street:
- The Nasdaq advanced around 21%
- The S&P 500 rose approximately 17.5%
- The Dow Jones Industrial Average moved up over 14%
In India:
- The Nifty 50 gained more than 10%
- The Sensex ended the year about 8.55% higher
Commodity ETF Returns:
- One year returns of Silver ETFs exceeded 270 percent
- Gold ETFs delivered returns of up to 72 percent in 2025
If an investor had invested in ETFs tracking these indices, their returns would have closely mirrored these benchmark performances, subject to tracking error and expense ratios.
(Note: The above data reflects market performance for the year 2025 and was compiled as of January 1, 2026. The figures are historical and shared for illustrative and educational purposes only. Past performance does not guarantee future returns.)
(Source: Times of India, The Economic Times, Moneycontrol)
Taxation of ETFs in India
Understanding taxation is essential while planning your investment strategy in exchange traded funds. Tax treatment depends on the type of ETF.
For Equity ETFs:
- Short term capital gains, held less than 1 year: 20 percent
- Long term capital gains, held more than 1 year: 12.5 percent on gains above ₹1.25 lakh
Dividend Income:
Taxed as per your income tax slab.
(Source: HDFC Mutual Fund)
Benefits of Exchange Traded Funds
- Diversification: With a single purchase, you gain exposure to multiple securities. This reduces the risk of depending on one company.
- Lower Costs: Because they are passively managed, exchange traded funds usually have lower expense ratios compared to many traditional mutual funds.
- High Liquidity: You can buy or sell ETFs during market hours at prevailing prices. This offers flexibility that traditional mutual funds do not provide.
- Transparency: Most ETF holdings are disclosed daily. Investors know exactly what they are investing in.
- Accessibility: There is no fixed large investment amount. You can purchase even one unit, depending on its market price.
(Source: DBS Bank)
Risks of Exchange Traded Funds
While exchange traded funds offer many advantages, they are not risk free.
- Market Risk: If the index or asset tracked by the ETF falls, the ETF value will also decline.
- Tracking Error: Sometimes ETFs do not perfectly match the index return. This gap is called tracking error and can occur due to fees or rebalancing delays.
- Liquidity Risk: Some ETFs may have lower trading volumes, leading to wider bid ask spreads.
- Complexity: Leveraged and inverse ETFs can be difficult to understand and may not suit beginners.
Being aware of these risks helps investors use exchange traded funds wisely.
(Source: DBS Bank)
How to Invest in Exchange Traded Funds on Paytm Money
Investing in exchange traded funds in India is simple.
- Step 1: Log in to your Paytm Money account using your registered mobile number and credentials.
- Step 2: Navigate to the ETFs section on the home screen and select the ETF of your choice.
- Step 3: Click on the Buy button to initiate your purchase.
- Step 4:Choose between Delivery, Intraday, or Pay Later based on how long you intend to hold the ETF units.
- Step 5: Enter the quantity of ETF units you wish to purchase.
- Step 6: Select your order type by choosing Market Price for execution at the current market rate or Limit Price to set your preferred buying price.
- Step 7: Review all order details carefully and place your order during market hours.
Important Factors to Consider Before Investing
Before investing in exchange traded funds, evaluate the following:
- Expense Ratio: Even a small difference in fees can impact long term returns.
- Liquidity: Higher trading volumes generally mean smoother transactions.
- Investment Horizon: Equity ETFs are better suited for long term goals, while bond ETFs may suit conservative investors.
- Asset Allocation: Ensure ETFs align with your broader portfolio strategy.
- Tax Planning: Understand capital gains rules to avoid surprises.
(Source: DBS Bank)
Are Exchange Traded Funds Suitable for You?
Exchange traded funds might be suitable for:
- Beginners seeking diversification
- Long term investors wanting low cost exposure
- Investors who prefer passive investing
- Those looking for global diversification
Conclusion
Exchange Traded Funds (ETFs) offer a simple, low-cost way to access diversified market exposure. With benefits such as transparency, liquidity, and passive management, ETFs have become an increasingly popular investment vehicle.
By understanding the types of exchange traded funds, their returns, risks, and taxation, you can make informed ETF investment decisions aligned with your financial goals and risk appetite.
When used strategically, ETFs can strengthen your portfolio and support long-term wealth creation through disciplined passive investing.
Disclaimer: Investment in the securities market is subject to market risks. Read all the related documents carefully before investing. This content is purely for information purpose only and in no way is to be considered as an advice or recommendation. The securities are quoted as an example and not as a recommendation. Investors are requested to do their own due diligence before investing.
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