What is an ETF, and how is it different from a mutual fund?
An ETF is a fund that trades like a share. That single difference changes how you buy it, what it costs, and one risk that does not exist in an ordinary mutual fund.
Last checked August 2026. Sources listed at the end.
The short version
- An ETF is a fund you buy and sell on the exchange through your , at a live price.
- Most ETFs track an index, so fees are very low. The SEBI cap fell to 0.90% in April 2026 and good ones charge far less.
- You need a . Ordinary do not require one.
- The market price can drift from the fund true value, especially in thinly traded ETFs.
- Equity ETFs are taxed like shares. Gold and international ETFs follow different rules.
What an ETF is
ETF stands for exchange traded fund. It holds a basket of investments, usually copying an index, exactly like an does. The difference is entirely in the plumbing of how you buy it.
An ordinary mutual fund is bought from the fund house. You place an order and receive units at that evening . An ETF is bought from another investor on the exchange, through your broker, at whatever price the two of you agree on right now. It behaves, from your side of the screen, exactly like buying a share.
So an ETF unit has two prices at once. The NAV is what the underlying holdings are actually worth. The market price is what someone will pay you for a unit at this moment. In a well traded ETF these stay very close. In a poorly traded one they can separate.
Why ETFs are cheap
Two reasons. First, most ETFs track an index, so there is no research team to pay. Second, the fund house does not have to handle your individual purchase or sale, because you trade with another investor rather than with the fund.
Under the SEBI (Mutual Funds) Regulations, 2026, effective 1 April 2026, index funds and ETFs share a fee cap that came down from 1.00% to 0.90%, now excluding statutory levies which are charged separately. As with index funds, the cap is a ceiling and competitive ETFs charge a small fraction of it.
But the is not your whole cost with an ETF. You also pay brokerage on each trade, and you pay the spread, which is the small gap between the buying and selling price at any moment. For someone investing a modest amount every month, those per-trade costs can quietly outweigh the lower fee.
The risk that does not exist in a mutual fund
This is the part most beginner guides skip, and it is the main reason to be careful.
With a mutual fund, the fund house is always on the other side of your trade at the day NAV. There is no question of finding a buyer. With an ETF, you need an actual counterparty on the exchange.
In a heavily traded ETF this is not an issue. In a thinly traded one, there may be very few orders on the screen, and you can end up buying meaningfully above what the units are worth or selling below. This gap is sometimes called the premium or discount to NAV.
Fund houses publish an indicative NAV, often called iNAV, updated through the trading day. Comparing the market price against it tells you whether you are paying a fair price right now.
Kinds of ETF available in India
| Type | What it tracks | Worth knowing |
|---|---|---|
| Equity index ETF | Nifty 50, Sensex, Nifty Next 50 and similar | The most heavily traded, and the usual starting point |
| Sector ETF | Banking, IT, pharma and so on | A concentrated bet on one industry, not a diversified holding |
| Gold ETF | The price of gold | Removes storage and purity worries. Taxed differently from equity |
| Debt ETF | Government or PSU bonds | Steadier, taxed at your slab rate for units bought after April 2023 |
| International ETF | Overseas indices | Subject to overseas investment limits, which have been capped at times |
A sector ETF deserves particular caution. It looks as diversified as any other ETF because it holds many companies, but they all rise and fall on the same industry news. That is a concentrated position wearing a diversified label.
How ETFs are taxed
The tax follows what the ETF holds, not the fact that it is an ETF.
- Equity ETFs, holding at least 65% Indian shares, are taxed exactly like shares. Sold within 12 months, 20%. After 12 months, 12.5% on gains above ₹1.25 lakh for the year, combined across all your equity gains.
- Gold ETFs. Listed gold ETF units bought on or after 1 April 2025 qualify as long term after 12 months, taxed at 12.5%. Gold mutual funds, whose units are not listed, keep the 24 month threshold. International ETFs follow the rules for other assets.
- Debt ETFs bought on or after 1 April 2023 are taxed at your income tax slab rate whatever the holding period.
Tax rules change and personal situations differ. Treat this as general information rather than tax advice.
ETF or index fund, for you?
They hold the same things. Choose on how you intend to invest, not on which is theoretically cheaper.
An index fund suits you if you are investing a fixed amount every month, you want it automatic, you would rather not think about order types, and you do not want to watch a price. This describes most beginners.
An ETF suits you if you already have a demat account and are comfortable placing orders, you are investing larger amounts less often so per-trade costs matter less, or you want exposure to something like gold where the ETF route avoids real world storage.
What to remember
- An ETF is a fund that trades on the exchange like a share, so you need a demat account and a broker.
- Most ETFs track an index and are very cheap, but brokerage and the spread add to the cost of every trade.
- The market price can drift from the true value in thinly traded ETFs. Check volume and use limit orders.
- Equity ETFs are taxed like shares. Gold, international and debt ETFs each follow different rules.
- For monthly investing, an index fund is usually simpler and cheaper in practice than an ETF.