ETFs: Why Indian investors are pouring Rs 12 lakh crore into them
India’s passive fund assets have doubled in three years, with ETFs accounting for nearly ₹12 lakh crore. But are they really as simple as they seem?
Indian investors are increasingly turning to passive funds, with total passive assets under management (AUM) reaching ₹15.42 lakh crore in August 2026. That is more than double the level seen three years ago, with exchange-traded funds (ETFs) accounting for nearly ₹12 lakh crore of the total.
According to the Association of Mutual Funds in India (AMFI) August 2026 snapshot, passive AUM rose 26.5% year-on-year. ETFs accounted for ₹11.97 lakh crore, while index funds held ₹3.45 lakh crore.
Also read | ‘Sahi hai’? Why mutual funds may not always be safe and the right investment for you
Most of this growth is being driven by ETFs. Retail and institutional investors are putting money into these funds as a way to gain diversified market exposure without picking individual stocks.
One basket
That one unit provides exposure to the underlying basket of stocks. This can mean diversification without having to place dozens of separate trades or track individual company balance sheets.
ETFs differ from conventional actively managed mutual funds in two important ways: How they are managed and how they are traded.
Active vs passive
In an active mutual fund, a fund manager selects stocks with the objective of beating the market. Units are generally bought or sold at the fund’s end-of-day net asset value, or NAV.
An ETF, by contrast, follows a passive strategy. It typically tracks an established index or commodity and trades on stock exchanges such as the National Stock Exchange and BSE.
Because ETFs trade like shares, investors can buy and sell them during market hours using a Demat and trading account. Their prices can therefore change throughout the trading session rather than being fixed at an end-of-day NAV.
Types of ETFs
The ETF universe in India extends beyond large-cap equity funds. Broadly, ETFs can be divided into five categories: Equity, commodity, debt, international and hybrid ETFs.
Equity ETFs track indices such as the Nifty 50 and Sensex, as well as specific sectors such as banking and IT. Commodity ETFs provide exposure to commodities such as gold and silver without requiring investors to physically store them.
Debt ETFs hold instruments such as government securities or corporate bonds, providing fixed-income exposure. International ETFs track overseas benchmarks such as the Nasdaq or S&P 500, while hybrid ETFs combine different asset classes.
Key risks
The appeal of ETFs comes from features such as diversification, transparency, relatively low expense ratios and the ability to trade during market hours. But passive investing does not mean risk-free investing.
The first major risk is market risk. An equity ETF tracking the Nifty 50 can fall when the broader market falls. Unlike an actively managed fund, there is no fund manager making a discretionary decision to move the portfolio away from the market to limit losses.
The second is tracking error. Ideally, an ETF tracking an index should deliver returns close to those of the index. In practice, expenses, cash holdings and trading differences can create a gap between the ETF's performance and that of its underlying index.
Pricing matters
The third issue is liquidity and pricing. Since ETFs trade on an exchange, their market price can sometimes differ from the underlying portfolio’s NAV, particularly during volatile market conditions.
Also read | Personal loans come at a click, but is taking them worth the risk?
Investors also need to account for brokerage charges, exchange fees and securities transaction tax, or STT. For frequent traders, these costs can reduce some of the advantage associated with ETFs’ relatively low expense ratios.
India’s growing passive investment market reflects the appeal of a relatively simple way to gain diversified exposure without relying on an active fund manager’s stock-picking decisions.
But the growing popularity of ETFs does not automatically make every ETF suitable for every investor. Investors need to consider the asset class, their investment horizon, the fund’s tracking difference and trading volumes before making a decision.
(The content above is for information only, and does not constitute investment advice.)
