Growth of ETFs in India – A Look at Market Evolution
- What is an ETF?
- Growth of ETFs in India
- Types of ETFs in India
- Factors Associated With ETF Growth
- Active Funds vs Passive Funds
- Why Can ETFs Be Powerful Wealth Creation Vehicles?
- Examples of ETF Segments
- Risks of ETF Investing
- Future of ETFs in India
- Final Thoughts
A Deep Dive into the Evolution and Market Development of ETFs in India
Over the last decade, India’s investment landscape has undergone a structural transformation. What started as a niche institutional product has evolved into one of the growing segments in the mutual fund industry — Exchange Traded Funds (ETFs).
ETFs in India have grown from relatively unknown investment vehicles into mainstream investment products used by retail investors, HNIs, family offices, RIAs, pension funds and institutions.
The rise of ETFs reflects a larger global trend toward passive investing, passive investing and market-linked exposure.
What is an ETF?
An ETF (Exchange Traded Fund) is a market-traded investment fund that tracks an index, commodity, bond basket, sector, theme or strategy. Unlike traditional mutual funds, ETFs trade on stock exchanges in real time, exactly like shares. Examples include:
➤ Nifty 50 ETF
➤ Sensex ETF
➤ Gold ETF
➤ Bharat Bond ETF
➤ Nasdaq 100 ETF
➤ Bank Nifty ETF
Key Characteristics of ETFs:
➤ Expense-ratio based pricing
➤ Passive investing approach
➤ Real-time trading
➤ Portfolio disclosure features
➤ Basket exposure
➤ Tax treatment varies in many cases
Growth of ETFs in India
The growth of ETFs in India over the last 10 years has been significant.
Initially, ETF participation was largely institutional, driven by government disinvestment programs and EPFO investments. However, with increasing investor awareness, digital investing platforms, and lower-cost investing trends, retail participation has expanded.
ETF Industry AUM Growth
| Year | ETF Industry AUM (Approx) |
|---|---|
| 2015 | ₹5,000 – ₹8,000 Cr |
| 2017 | ₹40,000 Cr |
| 2018 | ₹74,000 Cr |
| 2020 | ₹2 Lakh Cr |
| 2022 | ₹5 Lakh Cr |
| 2024 | ₹8 Lakh Cr |
| 2025 | ₹10 Lakh Cr+ |
The growth rate has been one of the fastest in the Indian mutual fund industry. ETF AUM crossed ₹10 lakh crore by 2025, reflecting rising institutional and retail participation.
Growth of Overall Mutual Fund Industry
| Year | Total MF Industry AUM |
|---|---|
| 2015 | ~₹12 Lakh Cr |
| 2018 | ~₹24 Lakh Cr |
| 2020 | ~₹27 Lakh Cr |
| 2022 | ~₹40 Lakh Cr |
| 2025 | ~₹80 Lakh Cr |
ETF Share in Overall MF Industry
| Year | ETF Share of MF Industry |
|---|---|
| 2015 | <1% |
| 2018 | ~3% |
| 2020 | ~6% |
| 2022 | ~10% |
| 2025 | ~12–13% |
This clearly indicates that ETFs are no longer niche products. They are steadily becoming a widely used investment format in India.
Types of ETFs in India
Equity ETFs
These track major indices such as Nifty 50, Sensex, Nifty Next 50 and Midcap indices. They are the largest ETF category in India.
Sectoral ETFs
These focus on sectors such as Banking, IT, Pharma, PSU or Infrastructure.
Gold & Commodity ETFs
Gold ETFs saw increased participation during uncertain markets because they provide exposure to gold without storage risk.
Debt ETFs
Debt ETFs such as Bharat Bond ETF provide access to high-quality bonds at low costs.
International ETFs
These allow Indian investors to participate in global markets such as Nasdaq 100 and S&P 500.
Smart Beta ETFs
These combine passive investing with factor-based investing such as Momentum, Value, Quality and Low Volatility.
Factors Associated With ETF Growth
🔸 Expense Ratio Comparison
Traditional active funds typically charge 1.5%–2.25%, while ETFs may charge as low as 0.05%–0.5%.
🔸 Portfolio Disclosure
ETF portfolios are usually disclosed daily, making holdings completely visible.
🔸 Exchange-Traded Structure
Investors can simply buy the market instead of selecting individual stocks or fund managers.
🔸 Better Technology Access
Online investing platforms and discount brokers have expanded access to ETF transactions.
🔸 Regulatory Support
Government and institutional participation has coincided with increased participation.
🔸 Increasing Awareness of Passive Investing
Global investing trends are influencing Indian investors toward passive allocation strategies.
Active Funds vs Passive Funds
One of the most important developments globally has been the increasing differences between active and passive performance benchmark indices over long periods.
SPIVA (S&P Indices Versus Active) reports globally and in India consistently show that a large percentage of active large-cap funds show varying benchmark outcomes over longer durations.
| Investment Period | % of Active Large Cap Funds Underperforming |
|---|---|
| 1 Year | ~60% |
| 3 Years | ~75% |
| 5 Years | ~90%+ |
| 10 Years | ~73–74% |
This observed across some market segments in mature and highly researched segments such as large caps.
However, active management may perform differently in:
🔸 Small caps
🔸 Mid caps
🔸 Flexi caps
🔸 Illiquid opportunities
🔸 Special situations
Why Can ETFs Be Powerful Wealth Creation Vehicles?
🔸 Expense Ratios and Long-Term Cost Differences
Even a 1.5% lower annual expense ratio can lead to different net outcomes over 20–30 years.
🔸 Reduced Dependence on Active Fund Management
ETF investors are not dependent on the capability or continuity of a fund manager.
🔸 Investment Behaviour Considerations
ETFs are commonly used in systematic approaches and reduce emotional decision-making.
🔸 Diversification
A single ETF can provide exposure to dozens or hundreds of companies.
🔸 Transparency
Investors always know what they own.
🔸 Simplicity
Investors can build long-term portfolios without constantly monitoring fund manager changes or strategies.
🔸 Broad Market Exposure
Owning broad Indian indices through ETFs provides linked to broad market indices.
Examples of ETF Segments
| Allocation Type | Example ETF |
|---|---|
| Core India Equity | Nifty 50 ETF |
| Growth Allocation | Nifty Next 50 ETF |
| Midcap Exposure | Midcap ETF |
| International Exposure | Nasdaq 100 ETF |
| Debt Stability | Bharat Bond ETF |
| Inflation Hedge | Gold ETF |
Risks of ETF Investing
While ETFs offer several advantages, investors should also understand the associated risks:
⚠️ Market Risk – ETFs will decline if the underlying market declines.
⚠️ Liquidity Risk – Some ETFs have low trading volumes.
⚠️ Tracking Error – ETF performance may slightly differ from the benchmark.
⚠️ Concentration Risk – Sector ETFs may be highly concentrated.
⚠️ International Risks – Currency and geopolitical issues affect global ETFs.
Future of ETFs in India
India is still in the early phase of ETF adoption compared to developed markets. Several factors indicate continued market development:
✅ Increasing SIP culture
✅ Growing financial literacy
✅ Digital investing adoption
✅ Lower cost preference
✅ Institutional participation
✅ Retirement and pension allocations
✅ Expansion of smart beta products
✅ Global diversification demand
Over the next decade, ETFs may become one of the important market segment in India.
Final Thoughts
The rise of ETFs in India is more than a product trend. It reflects the evolution of the Indian investor.
For decades, investing success was associated with:
➢ Stock picking
➢ Timing the market
➢ Finding the best fund manager
The ETF market revolution changes that framework toward:
➢ Staying invested
➢ Understanding cost structures
ETFs offer a combination of simplicity, transparency, diversification and cost efficiency.
As India’s economy grows over the coming decades, ETF investing could become one of the methods of market participation for investors to participate in that growth.
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