Exchange-Traded Fund (ETF) is an open-ended fund whose units are listed and traded on the stock exchange like an equity share. Most ETFs are passive (track an index), though active ETFs exist abroad and a few in India.
How it works: You buy/sell ETF units on NSE or BSE during market hours at the live market price (which trades close to the indicative NAV, kept honest by authorised participants who arbitrage any gap). Settlement is T+1, into your demat account, just like a stock.
Example: Nippon India ETF Nifty BeES tracks Nifty 50. If Nifty is at 22,000 and the ETF iNAV is Rs 240, the market price stays within Rs 0.20 of Rs 240 thanks to AP arbitrage. Brokerage + STT applies on each trade; TER is typically 0.05-0.10% per year.
When to use: When you want intra-day pricing, want to buy from a demat account, or are accessing thematic baskets (gold ETF, smart-beta, sectoral) not available cleanly as MFs.
When NOT to use: Pure SIP investors with no demat — open-ended Index Funds are simpler and avoid bid-ask spread costs. Also beware low-liquidity ETFs where the bid-ask spread can be wider than a years TER.
Caveat: Past performance is not indicative of future returns. Always check daily turnover and iNAV vs market-price spread before committing material capital.
Related terms: Index Fund, Tracking Error, NAV.