Does India Have ETFs? An In-Depth Guide for Investors

The short answer is yes, India has ETFs. The ETF market in India has expanded rapidly over the past decade, driven by rising interest in passive investing, greater financial literacy, and the introduction of products by various asset management companies (AMCs). But to understand the true potential and appeal of ETFs in India, we need to dig deeper into the details of how they work, their structure, and what makes them an attractive option for both domestic and international investors.

What Exactly Is an ETF?

An ETF, or Exchange Traded Fund, is a type of investment fund that is traded on stock exchanges, similar to individual stocks. ETFs pool money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities. The key difference between ETFs and mutual funds is that ETFs are traded on the stock exchange, providing liquidity and ease of trading throughout the day.

ETFs offer the benefit of low expense ratios, diversification, and tax efficiency, all of which make them highly appealing to both retail and institutional investors.

The History of ETFs in India

While the concept of ETFs originated in the U.S., India was not far behind in adopting this investment vehicle. The first Indian ETF, launched in 2001 by Benchmark Mutual Fund (now part of Nippon India Mutual Fund), tracked the Nifty 50 index. Since then, the market has seen a tremendous increase in the number of available ETFs, covering a wide range of asset classes.

As of 2024, India has over 100 ETFs, covering everything from equity and debt to gold and international indices. This growth can be attributed to increasing awareness among retail investors, institutional investments (including by pension funds), and the rise of low-cost, passively managed investment options.

Types of ETFs Available in India

India’s ETF market offers various types of ETFs, each catering to different investor needs and risk profiles. These include:

• Equity ETFs: These ETFs track indices like the Nifty 50 or the Sensex, allowing investors to invest in the overall performance of the stock market. Popular ETFs in this category include the SBI Nifty ETF and the HDFC Sensex ETF.

• Debt ETFs: A newer introduction, debt ETFs provide exposure to government or corporate bonds. These are lower-risk compared to equity ETFs. One notable example is the Bharat Bond ETF, launched by the government to deepen the bond market.

• Gold ETFs: For those interested in investing in gold but not wanting to buy physical bullion, gold ETFs offer an alternative. Gold ETFs track the price of gold, and the most popular ones include Kotak Gold ETF and HDFC Gold ETF.

• Sectoral and Thematic ETFs: These track specific sectors like banking, pharmaceuticals, or technology, or follow a particular investment theme. Examples include ICICI Prudential NV20 ETF (focused on value investing) and Motilal Oswal NASDAQ 100 ETF (focused on international equities).

Growth Drivers for ETFs in India

Several factors are contributing to the growth of ETFs in India. Some of the most important drivers include:

1. Increased Financial Literacy: With the proliferation of fintech apps and online brokers, more Indians are becoming aware of investment options like ETFs. Platforms such as Zerodha, Groww, and Upstox have simplified the process of buying and selling ETFs.

2. Institutional Participation: Large institutions such as the Employees' Provident Fund Organisation (EPFO) have been investing heavily in ETFs, particularly equity ETFs, as part of their asset allocation strategy. This has not only increased the liquidity of ETFs but also given them greater credibility.

3. Lower Costs: One of the most appealing aspects of ETFs is their low expense ratio compared to actively managed mutual funds. This is particularly significant in India, where cost-conscious retail investors are drawn to cheaper alternatives.

4. Diverse Offerings: The introduction of debt and gold ETFs, as well as international and sectoral ETFs, has provided a wider range of options for investors to diversify their portfolios according to their risk appetite.

5. Regulatory Support: SEBI (Securities and Exchange Board of India) has been actively promoting ETFs through policy changes, making it easier for asset management companies to launch new products and for investors to participate.

The Popularity of Gold ETFs in India

India has a cultural affinity with gold, and this has translated into the popularity of gold ETFs. Traditionally, Indians preferred physical gold in the form of jewelry or bullion, but with changing times and increased awareness, gold ETFs have gained traction. These allow investors to own gold without worrying about storage or purity issues.

Gold ETFs in India track the price of gold in international markets and are traded like stocks. The main benefits include liquidity, lower transaction costs compared to buying physical gold, and tax advantages. For example, Kotak Gold ETF and Axis Gold ETF are some of the most traded options in this category.

Bharat Bond ETF: A Game-Changer

Perhaps one of the most significant innovations in the Indian ETF market is the introduction of the Bharat Bond ETF in 2019. Launched by Edelweiss AMC, this ETF invests in bonds issued by public sector companies, making it a low-risk option for conservative investors. The success of this ETF has been instrumental in growing the debt ETF market in India.

The Bharat Bond ETF has also been credited with providing a liquid market for corporate bonds in India, an area that was previously lacking. It offers investors a transparent and low-cost way to participate in the fixed-income market, with the additional benefit of predictable returns.

Key Challenges Facing the ETF Market in India

Despite the rapid growth, the ETF market in India still faces several challenges:

1. Low Retail Participation: Even though awareness is increasing, the majority of ETFs in India are held by institutional investors, with retail participation lagging behind. Many retail investors still prefer mutual funds or direct stock investing due to familiarity.

2. Limited Product Variety: Although the number of ETFs has grown, the product range is still limited compared to markets like the U.S. For example, there are few ETFs offering exposure to emerging sectors like technology or ESG (Environmental, Social, and Governance) investing.

3. Liquidity Issues: While ETFs are traded on stock exchanges, not all of them are liquid. Some ETFs, particularly sectoral or international ones, see low trading volumes, making it difficult for investors to buy or sell large quantities without impacting the price.

4. Education and Awareness: Many investors in India are still not fully aware of how ETFs work or how to incorporate them into a long-term investment strategy. More educational initiatives are needed to bridge this gap.

How to Invest in ETFs in India

Investing in ETFs in India is a straightforward process, similar to buying stocks. Here’s how you can get started:

1. Open a Demat Account: A Demat (dematerialized) account is required to hold ETFs, just like you would for holding stocks. You can open a Demat account with any broker in India, including online platforms like Zerodha, Groww, or Upstox.

2. Choose the Right ETF: With a wide variety of ETFs available, it’s crucial to choose one that aligns with your investment goals. For example, if you want to invest in the overall Indian stock market, you might opt for an equity ETF like the SBI Nifty ETF. For conservative investors, debt ETFs like Bharat Bond ETF could be more suitable.

3. Place Your Order: Once you've chosen the ETF, you can place a buy order through your broker, just like buying stocks. The minimum investment is typically one unit, making it accessible to all investors.

4. Track Your Investment: ETFs are traded throughout the day, so you can monitor their performance in real time. However, since ETFs are often part of a long-term investment strategy, it’s important not to overreact to short-term market movements.

The Future of ETFs in India

The future of ETFs in India looks promising. With increasing awareness, the introduction of innovative products, and growing institutional participation, the ETF market is likely to continue its upward trajectory. Several developments, such as international ETFs that offer exposure to global markets, as well as more thematic and sectoral ETFs, are expected to draw more investors.

Additionally, the government’s support, especially with initiatives like Bharat Bond ETF, has laid a solid foundation for the growth of the debt ETF segment, which could see increased participation in the coming years.

In conclusion, India does have ETFs, and they are an excellent option for both novice and experienced investors looking to diversify their portfolios with low-cost, passive investment strategies. However, like any investment, it’s important to do your research and choose ETFs that align with your financial goals and risk tolerance.