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Market-linked investments

ETFs and Index Funds

Own the whole market, or a slice of it, at very low cost by copying an index instead of picking stocks.

Read the guide SIP Calculator
Regulator
SEBI
Costs
Usually among the lowest expense ratios
ETF trading
Bought and sold on the exchange during market hours
Index fund buying
Bought from the AMC at end-of-day NAV, SIP possible
Risk level: High

The risk is that of the index tracked: an equity index can fall as much as the market does.

What is it?

Passive funds hold the same securities as an index, in the same proportions. When the Nifty 50 rises 1%, a Nifty 50 index fund should rise close to 1%, minus its small costs. There is no fund manager trying to pick winners.

They come in two forms. An Exchange Traded Fund (ETF) is listed on the stock exchange and traded like a share through a demat account. An index fund is an ordinary mutual fund that you buy from the fund house, and you can invest in it through a SIP.

How it works

  1. The fund buys every stock or bond in the index at its index weight.
  2. When the index changes its constituents, the fund rebalances.
  3. The gap between the fund's return and the index return is called tracking difference; how much it varies is tracking error.
  4. ETF prices move all day and can differ slightly from the fund's real value (iNAV) when trading is thin.

Types

Broad equity indicesNifty 50, Sensex, Nifty Next 50, Nifty 500 and similar.
Factor and smart-beta indicesFollow rules such as low volatility, momentum, quality or value.
Sector and thematic indicesBanking, IT, PSU and other narrow themes, with higher concentration risk.
Debt and target-maturity fundsTrack government or PSU bond indices and mature on a fixed date.
Gold and silver ETFsTrack the domestic price of the metal.

Benefits and risks

Benefits

  • Very low cost, which compounds into a real advantage over long periods.
  • Transparent: you always know what you own.
  • No risk of a fund manager making poor stock choices.
  • Simple to build a diversified core portfolio.

Risks and drawbacks

  • You will never beat the index; you get its return minus costs.
  • Thinly traded ETFs can be bought or sold at a poor price.
  • ETFs need a demat account and you pay brokerage on each trade.
  • Narrow sector or smart-beta indices can be far riskier than they look.

How it is taxed

  • Equity ETFs and index funds are taxed like equity funds: 12.5% on gains above ₹1.25 lakh a year after 12 months; 20% within 12 months.
  • Debt index funds and debt ETFs bought on or after 1 April 2023 are taxed at your slab rate.
  • Gold and silver ETFs held over 12 months are taxed at 12.5%; earlier sales at your slab rate.
Rules for FY 2026-27, reviewed November 2026. Surcharge and cess apply on top. Tax rules change, so confirm before you file. Our tax team can help with your return.

Who it may suit

Investors who want market returns at the lowest cost, prefer simplicity, and are comfortable not trying to beat the market.

Getting started

  1. Decide whether you want an ETF (demat, intraday trading) or an index fund (SIP, no demat needed).
  2. Pick the index first, then compare funds tracking it on expense ratio and tracking error.
  3. For ETFs, check trading volumes and use limit orders.
  4. Hold for the long term and rebalance occasionally.

Common questions

Index fund or ETF: which is better?

Both track the index. Index funds are easier for SIPs and need no demat account. ETFs are often a little cheaper but need a demat account and enough trading volume.

Why does my index fund not exactly match the index?

Expenses, cash held for redemptions and the timing of rebalancing create a small gap. Lower and more stable gaps indicate a better-run fund.

This guide is general education, not investment, tax or legal advice, and does not recommend any product. Investments in securities markets are subject to market risks; read all related documents carefully before investing.