Exchange-traded funds, or ETF funds, have grown in popularity worldwide, yet in India, they remain less favoured compared to traditional mutual funds or direct stock investments. While ETFs combine the diversification benefits of mutual funds and the flexibility of stocks, several factors explain why they have not gained the same traction among Indian investors.
Understanding ETF funds
ETF funds are investment instruments that track an underlying index such as the Nifty 50 or Sensex. They are traded on the stock exchange, just like individual stocks. Unlike mutual funds, which are bought or sold through fund houses at the day’s net asset value (NAV), ETFs can be traded throughout the day at market prices. They typically have lower expense ratios and are considered a cost-effective way to diversify across sectors or asset classes.
Reasons why ETF funds are less popular in India
- Lack of awareness: Many retail investors are still unfamiliar with how ETFs function or how they differ from mutual funds. Limited investor education has slowed adoption.
- Trading requirement: To buy or sell ETF funds, investors need a demat account and trading platform access. This adds complexity for new investors who prefer simpler, one-click mutual fund platforms.
- Low liquidity: In India, several ETFs experience low trading volumes, leading to wider bid-ask spreads. This can make it difficult for investors to buy or sell units efficiently.
- Absence of regular SIP options: While mutual funds offer easy SIP setups, ETFs often require manual or broker-based investing, which reduces convenience for retail investors.
The future outlook for ETF adoption
ETF funds are gradually gaining attention, especially among informed investors and institutions. As awareness improves and online investment platforms simplify access, their popularity could potentially grow. For investors comfortable with self-managed portfolios, ETFs offer potential for diversification and cost optimisation.
Before investing in ETFs or mutual funds, it is advisable to assess your financial goals, risk appetite, and investment horizon. Consulting a financial planner or investment advisor can help align your decisions with long-term objectives.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.