Complete Guide to Investing in ETFs in India: Best Options, Taxation & Strategies for 2024

Exchange-Traded Funds (ETFs) have become a popular investment choice in India due to their low costs, diversification, and flexibility. Whether you're a seasoned investor or a beginner, understanding how to invest in ETFs can significantly enhance your portfolio. In this guide, we will cover everything you need to know about ETFs in India, from the basics of ETFs to choosing the best options, understanding tax implications, and developing long-term investment strategies.

How to invest in ETFs in India for beginners

ETFs are a low-cost, diversified investment option for Indian investors looking to build wealth over time.

What Are ETFs and How Do They Work in India?

ETFs (Exchange-Traded Funds) are investment funds that are traded on stock exchanges, much like stocks. They usually track a specific index, commodity, or sector, offering investors a way to gain exposure to a basket of assets without purchasing them individually. In India, ETFs are typically designed to track indices like the Nifty 50, Sensex, or sectoral indices.

How Do ETFs Work in India?

Trading: ETFs are bought and sold on exchanges like the NSE or BSE, and their prices fluctuate throughout the day based on market demand.
Diversification: By investing in a single ETF, you can diversify your portfolio, as ETFs usually hold a mix of stocks or bonds that track an index.
Low Costs: One of the key reasons ETFs are popular is their lower expense ratios compared to mutual funds in India, making them a cost-effective investment option.

How to Invest in ETFs in India for Beginners

If you're wondering how to invest in ETFs in India for beginners, the process is fairly simple:

Open a Demat and Trading Account: To start investing in ETFs, you first need a Demat account (to hold securities) and a trading account (to place buy/sell orders). You can open these accounts with brokers like Zerodha, Upstox, or Groww.
Select an ETF: Choose the right ETF that fits your investment goals. In India, popular ETFs include Nifty 50 ETFs, Sensex ETFs, gold ETFs, and sector-specific ETFs.
Place an Order: Once you've selected your ETF, you can place an order through your trading platform during market hours (9:15 AM to 3:30 PM IST).

Best ETFs to Invest in India 2024

Investing in ETFs in India offers a wide range of options, and here are some of the best ETFs to consider in 2024:

Nifty 50 ETFs: These ETFs track the Nifty 50 Index, one of the most popular indices in India. Example: Nippon India Nifty 50 ETF, ICICI Prudential Nifty Next 50 ETF.
Sensex ETFs: If you want exposure to the BSE Sensex, which includes the top 30 stocks in India, consider SBI ETF Sensex or ICICI Prudential Sensex ETF.
Gold ETFs: If you're looking to invest in gold without physically holding the commodity, HDFC Gold ETF and Nippon India Gold ETF are popular choices.
Sector ETFs: For exposure to specific sectors like banking or technology, sectoral ETFs such as ICICI Prudential Banking ETF and Nifty IT ETF are great options.
Bond ETFs: These are great for conservative investors looking for fixed-income exposure. Look at options like Nippon India ETF – Nifty SDL.

How to Choose the Right ETF for Long-Term Investment in India

Choosing the right ETF for long-term investment requires careful consideration of your financial goals and risk tolerance. Here are some key factors to look for:

Tracking Error: The tracking error refers to the difference between the ETF's performance and the performance of the index it tracks. Look for ETFs with a low tracking error to ensure they closely replicate the index's returns.
Expense Ratio: ETFs are known for their low expense ratios compared to mutual funds. Always check the expense ratio of an ETF before investing.
Liquidity: Liquidity is crucial because it impacts how easily you can buy or sell the ETF. Opt for ETFs with high liquidity and trading volume.
Historical Performance: While past performance is not always indicative of future returns, it can give you an idea of how well the ETF has tracked its index over time.

Difference Between ETFs and Mutual Funds in India

Many investors wonder about the difference between ETFs and mutual funds in India. The primary difference lies in the way they are traded and managed:

ETFs: Traded like stocks on the exchange, can be bought or sold throughout the day, and typically have lower expense ratios.
Mutual Funds: Bought and sold at the end of the trading day at NAV (Net Asset Value), and may have higher management fees due to active management.

Taxation on ETF Investments in India

Understanding taxation on ETF investments in India is crucial for optimizing returns. ETFs are subject to capital gains tax:

Short-Term Capital Gains (STCG): If you sell your ETF within a year of purchase, the gains are taxed at 15%.
Long-Term Capital Gains (LTCG): If you hold the ETF for more than one year, the gains are taxed at 10% (if they exceed ₹1 lakh in a financial year).

For ETFs based on bonds or commodities like gold ETFs, tax treatment may differ.

Best Sectoral ETFs to Invest in India for 2024

Sectoral ETFs are designed to provide exposure to specific industries or sectors. If you believe a particular sector will outperform the market, sectoral ETFs are an excellent choice. Some top sectoral ETFs include:

ICICI Prudential Nifty Bank ETF (Banking Sector)
Nifty IT ETF (Information Technology)
Nifty Pharma ETF (Pharmaceuticals)
Nifty FMCG ETF (Fast Moving Consumer Goods)

What is the Expense Ratio of an ETF and How Does It Affect Returns?

The expense ratio of an ETF is a measure of the annual cost to manage the fund. It includes administrative fees, management fees, and other costs. A higher expense ratio can eat into your returns over time. Generally, ETFs have lower expense ratios than mutual funds, making them a more cost-efficient investment choice.

How to Buy and Sell ETFs on NSE and BSE in India

Buying and selling ETFs on the NSE and BSE is similar to trading stocks. Here's how:

Log in to your trading account.
Search for the ETF you wish to buy (e.g., Nifty 50 ETF or Gold ETF).
Place a buy order and choose the number of units you want to purchase.
To sell, follow the same process, but choose the "sell" option.

Can I Invest in Foreign ETFs from India?

Yes, you can invest in foreign ETFs from India through platforms that allow international investments, such as ICICI Direct or Zerodha, which offer options to invest in global markets. You can buy ETFs that track indices like the S&P 500, or other foreign sectors.

Long-Term Investment Strategies Using ETFs in India

Investing in ETFs for the long-term can help you build wealth steadily. Here's a strategy for long-term ETF investing:

Start with broad-market ETFs like Nifty 50 or Sensex ETFs for diversified exposure.
Include sectoral ETFs to take advantage of potential growth in specific sectors (e.g., IT, banking, or healthcare).
Reinvest dividends received from ETFs to maximize compounding growth.
Monitor performance periodically and rebalance your portfolio to align with changing financial goals.

Is Investing in Nifty 50 ETF a Good Idea in 2024?

The Nifty 50 ETF is often considered a good long-term investment due to its diversification and the performance of top blue-chip companies in India. If you're looking for a stable, relatively low-risk investment with steady growth, investing in Nifty 50 ETFs can be a solid choice in 2024.

Conclusion

Investing in ETFs in India can be a great way to diversify your portfolio, reduce costs, and gain exposure to broad market indices or specific sectors. Whether you're a beginner or a seasoned investor, ETFs offer flexibility, liquidity, and transparency. By choosing the right ETFs, understanding tax implications, and employing long-term investment strategies, you can optimize your investment returns.

By following the tips and information outlined in this guide, you’ll be better equipped to make informed decisions about how to invest in ETFs in India and grow your wealth over time.