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What Are ETFs and Why They Might Be Better Than Mutual Funds?
In recent years, the popularity of ETFs (Exchange-Traded Funds) in India has surged, and for good reason. If you're looking to invest in the stock market and create long-term wealth, understanding how ETFs work can make a significant difference.
This article covers what ETFs are, how they work, which ETFs are best for investing, and how they can potentially generate higher profits compared to mutual funds.
Understanding ETFs vs. Mutual Funds
At first glance, ETFs and mutual funds may seem similar. Both are baskets of stocks that offer diversification. However, ETFs are often cheaper and more transparent. One key difference is the expense ratio — ETFs typically have much lower costs, sometimes 4 to 5 times cheaper than mutual funds. Moreover, ETFs don’t carry exit loads, and they trade live on stock exchanges, meaning you can buy and sell them at market prices throughout the day, unlike mutual funds which are traded at the day’s closing NAV (Net Asset Value).
What is an Index and How Does It Relate to ETFs?
To understand ETFs better, you need to understand stock indices. For instance, Nifty 50 is an index made up of 50 of the largest companies listed on the National Stock Exchange (NSE). Similarly, BSE has Sensex, which includes 30 companies. Indexes are essentially benchmarks that represent specific segments of the stock market.
Nifty 50 includes major companies like HDFC Bank, ICICI Bank, Reliance, Infosys, and Airtel. These stocks carry different weights — HDFC Bank has one of the highest weightages, meaning any movement in this stock heavily influences the index.
Now, if you want to invest in a specific sector like healthcare or consumer services instead of the entire market, you can do that too. NSE offers multiple sector-specific indexes such as Nifty Bank, Nifty Auto, Nifty FMCG, Nifty IT, and more. Each of these indexes also has associated ETFs.
Popular ETFs Based on Market Indexes
Let’s look at some of the most popular broad-based ETFs in India:
- Nifty 50 ETF (Nifty Bees) – Follows the Nifty 50 index. It’s highly liquid and widely traded.
- Nifty Next 50 ETF (Junior Bees) – Represents the next 50 companies after the top 50. Often gives higher returns due to emerging companies.
- Nifty Midcap 150 ETF – Focuses on mid-cap companies.
- Nifty Small Cap 250 ETF – Focuses on small-cap companies.
- Nifty 100, 200, and 500 ETFs – These offer broader exposure to the overall market.
Historical Performance
- Nifty Bees has returned over 245% post-COVID.
- Junior Bees (Nifty Next 50 ETF) delivered more than 340% in the same period.
- Midcap 150 ETFs have also shown significant growth with over 150% returns.
Sector-Specific ETFs
If you believe a specific sector will outperform, you can invest in these sectoral ETFs:
- Nifty Auto ETF (Auto Bees) – Invests in top automobile companies.
- Nifty Bank ETF (Bank Bees) – Invests in top banking stocks.
- Nifty IT ETF (IT Bees) – Invests in major IT companies like Infosys, TCS, and Wipro.
- Private Bank ETF – For investing in private sector banks.
- FMCG ETF – Covers companies like HUL, Nestle, and Britannia.
- Infrastructure ETF – Includes stocks from the infra sector.
Thematic ETFs
Thematic ETFs follow specific investment themes, such as:
- EV (Electric Vehicle) ETF – Focuses on the electric vehicle ecosystem.
- Railway ETF – Invests in railway-related companies.
- Defense ETF – Focuses on India’s defense sector.
- CPSE ETF – For investing in public sector companies.
These ETFs allow investors to take exposure to high-growth opportunities within certain emerging themes.
Strategy-Based ETFs
You can also invest using strategy-based ETFs, like:
- Momentum ETFs (MOM 30) – Invests in stocks showing high momentum.
- Alpha ETFs – Focus on outperforming stocks based on certain metrics.
- Smart Beta ETFs – Combines traditional indexing with rules-based investing.
International and Commodity ETFs
If you want global exposure, you can invest in:
- MON 100 ETF – Allows investment in the U.S. stock market via NSDC.
- Gold Bees – For exposure to gold.
- Silver ETFs – For investing in silver.
- Liquid Bees – Used to park surplus cash for short-term, fixed returns.
- Gilt ETFs – Invests in government securities.
Liquidity in ETFs – Myth vs. Reality
One common myth about ETFs is that they lack liquidity. But that’s far from true. Popular ETFs like Nifty Bees have AUMs over ₹48,000 crore, which means they have ample liquidity even for large investors. For smaller investments (₹10,000 to ₹10 crore), you’ll face no issues with liquidity. However, newly launched ETFs with low AUMs (under ₹100 crore) may have slight pricing spreads if you’re making large transactions.
How to Start SIP in ETFs
You can start a Systematic Investment Plan (SIP) in ETFs through your demat account:
- Open a free demat account (many brokers offer this).
- Go to the “Invest” section and search for the ETF you want.
- Enter the SIP amount or number of units.
- Set it weekly or monthly — and that’s it!
SIP in ETFs gives you long-term exposure with cost efficiency and full control over pricing.
Final Thoughts – Best ETF Picks and Diversification Strategy
The key to successful investing is diversification. You don’t need to pick just one ETF. You can build a portfolio like:
- Nifty Bees for overall market exposure.
- Junior Bees for growth.
- IT Bees and Pharma Bees for sector-specific exposure.
- Gold Bees and Silver ETFs for asset diversification.
- Liquid Bees for parking idle funds.
- MOM 100 for global investing.
This ensures you’re covered across market caps, sectors, and geographies.
Conclusion
ETFs are the future of low-cost, transparent investing in India. With increasing awareness and growing investor interest, more ETFs are being launched regularly. Whether you’re a beginner or an experienced investor, ETFs offer a smart way to participate in the equity market with flexibility and control.
So, if you want to start investing in ETFs, open a free demat account, pick your preferred ETFs, and start your SIP. Don’t fall for outdated myths. ETF investing is simple, strategic, and scalable.
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