What's Driving the ETF Boom in India?

Vidhi Mehta:  Hello everyone and welcome to Funds ka Funda. 

ETFs have slowly become an important investment story in India. They have crossed the ₹10 lakh crore mark, but when we ask many investors what an ETF is, the usual answers are still Gold ETF or Nifty 50 ETF. 

But the ETF universe is much wider than that. 

To break this down, we have with us Siddharth Srivastava, who will help us understand the ETF universe, how ETFs work, and how investors can use them in their portfolios.  Hi Siddharth, welcome to the show. 

 
What Is an ETF? 

Vidhi Mehta:  Let me start with a very basic question. What is an ETF? 

Siddharth Srivastava:  An ETF, or Exchange Traded Fund, is a fund that tracks an underlying index by investing in the securities of that index in the same proportion. 

This index can be based on a broad market category like large cap, a sector like banking, a theme like electric vehicles, international markets like the US, commodities, or even strategies such as momentum and low volatility. 

So, while ETFs may sound simple because they track benchmarks, the opportunity set is very wide. ETFs can cater to different investment objectives and risk profiles. They can be broad-based or focused on a specific opportunity. 

Do Investors Need ETFs If They Already Have Stocks and Mutual Funds? 

Vidhi Mehta:  If an investor already has a portfolio of stocks and mutual funds, do they still need ETFs? 

Siddharth Srivastava:  Stock investing is different. If an investor has conviction in a particular stock, there is nothing wrong with buying and holding it. 

But ETFs are useful when an investor wants exposure to a segment, sector, theme, or strategy without having to select individual stocks. 

For example, if someone has a positive view on banking stocks but does not want to choose one or two specific banks, they can invest in a Bank ETF. Similarly, if someone wants to take a contrarian view on IT, they can use an IT ETF instead of trying to pick individual IT stocks. 

The same applies to themes like energy, defence or manufacturing. If the investor’s view is on the theme rather than one specific company, ETFs can make more sense. 

Can Beginners Start with Broad-Based ETFs? 

Vidhi Mehta:  For a beginner, can a broad-based ETF be a good starting point? 

Siddharth Srivastava:  Yes. For someone entering mutual funds or ETFs for the first time, it is better to start with a simple, plain-vanilla product such as a Nifty 50 ETF. 

First, investors need to understand how markets behave across different cycles. Once they are comfortable with a simple product, they can gradually explore more complex categories such as sectors, themes and strategies. 

Three Things to Check Before Selecting an ETF 

Vidhi Mehta:  What are the three things investors should check before selecting an ETF? 

Siddharth Srivastava:  The first check is whether the ETF matches your investment objective. 

Investors should understand the index methodology and the portfolio created by that methodology. It should suit their investment objective and risk profile. 

The second check is liquidity. Since ETFs are bought and sold on the exchange, investors should ensure that the ETF is easily tradable. 

The third check is the expense ratio. Lower expenses matter, especially over longer periods. 

So, broadly, investors should check: 
• Investment objective and index methodology 
• Liquidity on the exchange 
• Expense ratio 

The ETF Universe Is Much Larger Than Nifty 50 and Gold 

Vidhi Mehta:  In India, ETF conversations often start and end with Nifty 50 and Gold ETFs. But the universe is much larger. Can you take us through the broad ETF categories? 

Siddharth Srivastava:  There are more than 330 ETFs in India today. 

A large share of assets is in broad-market ETFs such as Nifty 50 or Sensex ETFs. Then there are commodity ETFs like gold and silver ETFs. 

Beyond that, there are sectoral ETFs such as Bank ETFs and IT ETFs. There are thematic ETFs based on manufacturing, EV, internet, IPOs, consumption, healthcare and other themes. 

There are also factor-based ETFs, such as momentum, low volatility, high dividend, equal weight and value strategies. 

International ETFs also exist, such as those linked to global markets or global technology themes. 

On the debt side, there are government security ETFs, SDL-based products and liquid ETFs, which can be used for parking idle money in a broking account. 

Each ETF category has a different use case. Some can fit into the core portfolio, some into satellite allocation, some can be used for long-term investing, and some for tactical opportunities. 

Core, Satellite and Tactical Use of ETFs 

Vidhi Mehta:  How should investors think about where ETFs fit in their portfolio? 

Siddharth Srivastava:  Some ETFs can form part of the core portfolio. For example, broad-market ETFs such as large-cap, mid-cap or small-cap ETFs can give diversified exposure. 

Some ETFs can be used as satellite allocations. For example, if an investor has a strong view on defence, manufacturing, energy or consumption, they can take limited exposure through thematic ETFs. 

Some ETFs can also be used tactically. For example, if someone believes IT or metals may recover over the next few months, they may use an ETF to take that view without selecting individual stocks. 

This is one reason ETFs are becoming popular. They offer transparent and focused exposure to a sector, theme or market. In a way, they allow investors to act like their own fund manager. 

Debt ETFs and Their Use Cases 

Vidhi Mehta:  Retail investors are still not using debt ETFs to a large extent. What role can debt ETFs play? 

Siddharth Srivastava:  Debt products have seen some impact due to taxation changes. Earlier, target maturity funds were doing well, but inflows are now lower. 

That said, debt ETFs can still be useful. For example, government security ETFs can provide duration exposure. Many debt ETFs are based on government securities, SDLs or AAA-rated instruments, so investors get clarity on the credit quality of the underlying assets. 

Longer-duration debt ETFs can be used for duration calls, while liquid ETFs can help investors park idle money. 

Debt ETF adoption may grow slowly, but product innovation can help increase their popularity over time. 

Where Can the ETF Industry Go in the Next 5–10 Years? 

Vidhi Mehta:  Where do you think the ETF industry can be in the next 5 to 10 years? Will it compete more closely with the mutual fund industry? 

Siddharth Srivastava:  The share of ETFs has grown significantly. Around five years ago, ETFs had roughly 8% share in AUM. Today, ETFs alone are around 15%, and if you add index funds, the share is closer to 18%–19%. 

Folio share has also grown meaningfully. 

This growth is not just because of the active versus passive debate. A lot of product innovation is happening on the passive side. Regulations allow only one active fund in a category like large cap, but multiple index-based products can exist with different objectives, risk profiles and performance patterns. 

Trading volumes have also increased sharply. The average daily ETF trading volume rose from around ₹2,200 crore in the first half of last year to ₹3,300 crore in the second half. In the first quarter of this year, it crossed ₹10,000 crore. 

This shows that ETFs are being used not only for long-term investing but also for tactical opportunities. 

Why Intraday Pricing Is an Advantage 

Vidhi Mehta:  Unlike mutual funds, where investors get the closing NAV, ETFs can be bought at market prices during the day. Is that a big advantage? 

Siddharth Srivastava:  Yes, that is a meaningful advantage.  ETFs allow investors to use intraday levels. If markets are down 1% or 2% during the day, investors can use that opportunity to buy at those levels.  This can help improve the average acquisition cost. It also works from a behavioural point of view because investors feel they are entering at a level they are comfortable with. 

India vs Global ETF Markets 

Vidhi Mehta:  The US ETF market is much larger. India is still around 14%–15% in terms of ETF share. Are we moving slowly, or can India become competitive over time? 

Siddharth Srivastava:  India can become competitive in terms of market share over time. 

The ETF market in the US started much earlier, in the 1990s. In India, the first ETF came in 2000, but real awareness started building later, especially around 2018–2020. So, India started late, but traction has picked up meaningfully in the last few years. Product innovation, investor freedom and unique use cases will support ETF growth. There are many investors with different interests internet, AI, defence, manufacturing and so on. ETFs can help cater to such specific opportunities. 

Why Some Global ETFs Trade at a Premium 

Vidhi Mehta:  Some global ETFs are trading at a premium. What does that mean? 

Siddharth Srivastava:  When an ETF trades at a premium, it means the real-time NAV may be ₹100, but investors are paying more than ₹100 to buy the unit. In some global ETFs, the premium is currently around 20%. This is because the mutual fund industry has an overseas investment limit of $7 billion. Since that limit is close to being reached, AMCs cannot create fresh units in some offshore ETFs.  When demand exists but fresh supply cannot be created, existing units trade at a premium on the exchange.  It is like a situation where only a limited number of iPhones are available and no new supply is coming in. The available units start quoting at higher prices. 

Should Investors Buy Global ETFs at a Premium? 

Vidhi Mehta:  If investors are paying around 20% extra for a global ETF, is that a red flag? Should they avoid it? 

Siddharth Srivastava:  The simple answer is that investors should avoid buying at such a premium.  Some investors may have made money because they bought at a premium and were able to sell later at a premium. But the risk is that if the premium goes away, the investor can be hurt.  If fresh unit creation resumes or demand reduces, the premium can compress. So, investors should be careful about paying significantly above NAV. 

Common Myths About ETFs 

Vidhi Mehta:  What are some common myths about ETFs? 

Siddharth Srivastava:  One myth is that ETFs work only in bull markets. That is not correct. ETFs can be based on many strategies, factors and themes. Even when Nifty 50 is not doing well, other ETFs such as equal weight, mid-cap, small-cap, metal or energy ETFs may perform differently.  Another myth is that ETFs only mean Nifty 50. As we discussed, the ETF universe is much wider.  A third myth is that ETFs do not carry risk. ETFs do not carry fund manager risk in the same way as active funds, but they still carry market risk. If you invest in a theme or factor, you also take on the risk of that theme or factor.  So investors should understand the index, methodology, portfolio and historical behaviour before investing. 

Does India Need More ETF Product Innovation? 

Vidhi Mehta:  Does India still lack some ETF products compared to global markets? 

Siddharth Srivastava:  Yes, there are certain restrictions today. For example, India does not currently allow inverse ETFs, leveraged ETFs, derivative-based ETFs like covered call ETFs, or active ETFs.  However, the regulator has been supportive of the passive industry. Over time, as the market evolves, some of these categories may become possible.  The objective should be to provide solutions for different opportunities. Investors can then choose what suits their portfolio. 

View on Gold and Silver ETFs 

Vidhi Mehta: What is your current view on gold and silver ETFs? 

Siddharth Srivastava: Both gold and silver have delivered very strong returns over the last year. Gold is up around 65%–70%, while silver is up around 140%–150%, depending on when one is viewing the data.  Because of these sharp moves, expectations should be muted. From a risk-reward perspective, we are more positive on gold compared to silver.  Investors who actively track markets may use silver volatility, but otherwise, it may be better to stay tilted towards gold. A possible allocation could be 80:20 or 75:25 between gold and silver.  Investors should also watch policy changes, import duties and restrictions because these can affect premiums, discounts and demand in these commodities. A staggered approach is better than investing all at once. 

How Mirae Asset Differentiates in ETFs 

Vidhi Mehta:  Mirae Asset has been an early mover in ETFs. How does Mirae Asset differentiate itself in the ETF universe? 

Siddharth Srivastava:  The first differentiator is the product basket. We have the largest number of ETFs by any AMC in India, with 38 ETFs. If we add fund of funds and index funds, the number is closer to 70 products.  The second focus is exchange infrastructure. We have worked to ensure liquidity in Mirae Asset ETFs across market conditions, with low spreads and better ease of buying and selling.  So the two key differentiators are product innovation and convenience on exchange. 

How to Build an ETF Portfolio 

Vidhi Mehta:  If someone wants to build an ETF portfolio, what kind of allocation or themes would you suggest? 

Siddharth Srivastava:  The first step is to create a base. That can be done through a multicap ETF.  Then, one can add two themes at most. I like new-age consumption because discretionary spending is increasing. This theme can include autos, internet economy, real estate and related sectors. Manufacturing is another theme I like for a 10-year portfolio. Defence can be a component within manufacturing, but a broader manufacturing exposure may be more suitable.  Then one can add gold and silver, and also consider international ETF exposure. 

A possible portfolio could include: 
• A multicap ETF as the base 
• 10%–15% in two themes 
• Gold and silver exposure 
• Around 30% international ETF exposure 

Conclusion 

Vidhi Mehta:  Thank you so much, Siddharth. It was great speaking with you. 

Siddharth Srivastava:  Thank you so much for having me on the show. 

Disclaimer:  Mutual Fund investments are subject to market risks. Please read all scheme-related documents carefully before investing.