Blog continues below...
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Related Blogs on Equity Passive Funds:
Low Expense Ratios, High Returns: Why Passive Equity Funds Matter
How to Buy Nifty Midcap 150 Index
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2. Select equity ETFs, their asset size, expense ratios, trading volumes, etc.
The table attached provides a snapshot of 14 equity ETFs based on four major stock indices, namely, Nifty 50, Sensex, Nifty Next 50 and Nifty Midcap 150.
The data include, AUM or assets under management, expense ratio, tracking error, daily average volume, daily average traded value in rupee terms and daily average number of trades.
The volume data presented here are for a period of one year between 12Jun2024 and 11Jun2025.
Observations from the above table:
> only volume data from NSE India stock exchange are taken, whereas BSE volume data are ignored, as ETF volumes on BSE are thin in most cases
> ETFs managed by public sector-owned mutual funds are ignored as they suffer from EPFO risk and may be detrimental to the interests of long term retail investors
> ETFs based on BSE Sensex may not be suitable for most of the investors because their trading volumes are very thin
> as can be observed from the above table, for example, ICICI Prudential BSE Sensex ETF has daily average volume of less than 10,000 (trade value Rs 84 lakh); and LIC MF BSE Sensex ETF has just a daily average volume of about 250 (traded value Rs 2.30 lakh)
> among the primary stock indices, ETFs based on Nifty 50 are the most popular -- their asset size is huge, expense ratios are very low between 0.03 and 0.05 per cent, their tracking errors too are very low and they have high trading volumes, in addition to high daily average number of trades
> for example, Mirae Asset Nifty 50 ETF has daily average trading volumes of 3.45 lakh, with daily average value of transactions being Rs 883 lakh
> ETFs based on Nifty Next 50 and Nifty Midcap 150 as presented in the above table too have decent trading volumes and considerable traded value -- the liquidity is good enough for retail investors
> many ETFs based on the above four flagship indices have AUM of less than Rs 200 crore; as such, they are ignored for the purpose of this analysis
> only top three or five ETFs based on an index are considered for this; as making a comprehensive analysis of all ETFs is outside the scope of this write-up
> you may have observed most of the 14 ETFs illustrated above are from
just three fund houses, namely, Nippon India, ICICI Prudential and Mirae
Asset -- we ignored PSU-owned ETFs here
3. Checklist before investing in equity ETFs
While ETFs offer simplicity, transparency and cost-efficiency, investors should still take a few essential precautions before investing:
a). Understand the underlying index -- Ensure you're familiar with the index the ETF tracks—be it the Nifty 50, Sensex, Nifty Next 50, or Midcap 150. Each has a different risk-return profile. For example, midcap indices may offer higher returns but come with greater volatility.
b). Look beyond just low expense ratios -- While expense ratios are crucial, they aren’t the only cost. Tracking error, bid-ask spreads, and trading costs also impact your overall returns. A slightly higher expense ratio may be acceptable if the ETF offers tighter tracking and better liquidity.
c). Evaluate liquidity: both in volume and value -- ETFs
priced below Rs 100 often witness higher trading volumes on stock
exchanges compared to those priced above, say, Rs 200. As such, focusing
solely on unit volumes can be misleading. It is equally important to
consider the average daily traded value in rupee terms, which provides a
more comprehensive view of real liquidity.
d). Avoid thinly-traded ETFs -- ETFs with very low trading activity may have wider bid-ask spreads, making it harder to buy or sell eficiently. This can hurt returns, especially for larger or more frequent transactions.
e). Watch out for PSU-backed ETFs -- ETFs managed by PSU-owned AMCs may carry unique risks—such as concentrated ownership by EPFO or other government institutions—which can impact liquidity and price discovery. Some of these ETFs are excluded from this analysis for that reason (PSU is public sector undertaking).
f). Understand the NAV-Price gap (premium or discount) -- ETFs trade on the stock exchange like shares, so their market price can deviate from the NAV (Net Asset Value), especially in low-liquidity situations. Persistent or large gaps between the NAV and trading price can lead to buying above fair value or selling below it—eroding potential returns.
In the past six months, there are several instances where ETFs based on foreign stock indices, like, Nasdaq and Hang Seng, have quoted at exorbitant premiums of 20 to 25 per cent above their underlying NAV or net asset value.
g). Tax Implications -- Equity ETFs based on Indian stock indices are taxed like equity-oriented mutual funds in India (however, it's better to consult your tax advisor before considering any investments).
4. Concluding remarks
Choosing the right India equity ETF goes beyond simply tracking a popular index. By applying filters such as low expense ratios, strong asset size and consistent trading volumes, investors can identify funds that offer better cost efficiency, reduced tracking error and ease of entry and exit.
As the Indian ETF ecosystem continues to mature, these parameters will become even more critical in distinguishing good investment avenues from less efficient ones.
Ultimately, a disciplined approach to ETF selection can significantly enhance portfolio performance—especially in a setting where minimising costs and maximising liquidity are key.
Stay informed, review fund metrics periodically and make sure your ETF choices are in line with your long-term investment goals.
Investments discussed here are for informational and educational purpose only; readers must be guided by their investment / financial / tax advisors before considering any investments.
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P.S.: The following update is added after the blog was published on 12Jun2025:
On 18Jun2025, I came to know EPFO started investing (wef 03Jul2023) in ETFs based on Nifty 50 and Sensex indices from Nippon India MF and ICICI Prudential MF, in addition to those from SBI MF and UTI MF (the details were highlighted on 19Jun2025 in charts 51 to 55 of Indian Economy data bank).
Retail investors are better off if they avoid investing in the following 10 ETFs, due to large investor risk or EPFO risk >
References:
Weblinks to check Volumes of the ETFs are given below:
ETF Volumes data:
Volumes for ETFs are extremely important to consider before investing.
NSE Market Watch - Exchange Traded Funds / ETFs (to check volumes)
Nifty 50 ETFs (only top 5) with highest AUMs as of 31May2025 (ignored ETFs of PSU-owned AMCs)
BSE Sensex ETFs (only top 3) with highest AUMs as of 31May2025 (ignored ETFs of PSU-owned AMCs)
Nippon India BSE Sensex ETF (not traded on NSE)
Nifty Next 50 ETFs (only top 3) with highest AUMs as of 31May2025 (ignored ETFs of PSU-owned AMCs)
Nifty Midcap 150 ETFs (only top 5) with highest AUMs as of 31May2025 (ignored ETFs of PSU-owned AMCs)
(note:
you may have observed most of the 14 ETFs illustrated above are from
just three fund houses, namely, Nippon India, ICICI Prudential and Mirae
Asset -- we ignored PSU-owned ETFs here)
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Read more:
Low Expense Ratios, High Returns: Why Passive Equity Funds Matter 06Jun2025
Opinion on Maharashtra Seamless 15Nov2024
Disclosure: I've got a vested interest
in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if
any.
Disclaimer: The analysis and
opinion provided here are only for information purposes and should not be construed
as investment advice. Investors should consult their own financial advisers
before making any investments. The author is a CFA Charterholder with a vested
interest in financial markets.
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