Different Types of ETFs in India & How to Choose the Right One?

Exchange-Traded Funds (ETFs) have transformed the way investors build and diversify their portfolios. Once seen as simple index-tracking instruments, ETFs now span almost every imaginable investment theme - from green energy and artificial intelligence to gold, government bonds, and even strategies that profit when markets fall.

In India and globally, the ETF market is growing rapidly. According to AMFI data (2025), India’s ETF assets crossed ₹8.7 lakh crore, reflecting a surge in both institutional and retail participation. With so many types available, understanding how different ETFs work is essential for making smarter investment choices.

Let’s explore the major types of ETFs and what each offers to your investment strategy.

What Are ETFs?

Before diving into the types, let’s recap what ETFs actually are.

An ETF (Exchange-Traded Fund) is a type of investment fund that pools money from investors to buy a basket of securities, such as stocks, bonds, or commodities, and trades on stock exchanges like a regular share.

The biggest advantage? Liquidity, diversification, and cost efficiency.

You can buy or sell ETFs throughout the trading day, just like equities, while enjoying the diversification of a mutual fund.

1. Index ETFs – The Foundation

These are the most common and straightforward ETFs. They track a specific market index such as the Nifty 50, Sensex, or S&P 500.

• Example: Nippon India ETF Nifty BeES or ICICI Prudential Nifty 50 ETF.
• Why invest: They provide broad market exposure at a low cost.
• Ideal for: Long-term investors seeking to mirror overall market performance.

According to NSE data, index ETFs account for over 60% of India’s ETF volumes, making them a popular entry point for new investors.

2. Sector and Thematic ETFs

These ETFs focus on specific industries or investment themes — such as technology, healthcare, banking, or renewable energy.

• Example: Mirae Asset Nifty Financial Services ETF, Kotak Nifty IT ETF.

• Why invest: Allows targeted exposure to high-growth areas.

• Ideal for: Investors who believe in the long-term growth potential of a particular sector.

In recent years, thematic ETFs around electric mobility, infrastructure, and clean energy have gained strong momentum among Indian investors.

3. Bond ETFs

Bond ETFs invest in fixed-income securities such as government bonds, corporate bonds, or treasury bills.

• Example: Bharat Bond ETF – India’s first corporate bond ETF.

• Why invest: They offer regular income potential with relatively lower volatility compared to equities.

• Ideal for: Conservative investors looking for diversification beyond equities.

Bond ETFs are also useful for laddering strategies, helping investors manage interest rate risk.

4. Commodity ETFs

These ETFs give exposure to commodities like gold, silver, or oil — without needing to physically hold them.

• Example: Nippon India ETF Gold BeES, HDFC Gold ETF.

• Why invest: Commodities act as a hedge against inflation and currency depreciation.

• Ideal for: Diversifying portfolios during uncertain or inflationary periods.

In India, Gold ETFs have seen record inflows in 2024–25, as investors sought safe-haven assets amid global volatility.

5. International ETFs

These ETFs allow investors to access foreign markets from within India.

• Example: Motilal Oswal Nasdaq 100 ETF or Nippon India Hang Seng BeES.

• Why invest: Provides exposure to global giants like Apple, Google, and Tesla.

• Ideal for: Investors seeking geographic diversification and participation in global growth trends.

With the Indian rupee’s long-term depreciation trend, global ETFs can also provide a currency diversification benefit.

6. ESG ETFs

ESG (Environmental, Social, and Governance) ETFs focus on companies that meet sustainability and ethical standards.

• Example: Mirae Asset ESG Sector Leaders ETF.

• Why invest: Aligns profit with purpose by supporting responsible businesses.

• Ideal for: Investors who prioritize sustainability while seeking returns.

According to Morningstar’s 2024 report, global ESG ETF assets crossed $500 billion, and India’s ESG-focused funds are gradually gaining traction as awareness increases.

7. Leveraged ETFs

Leveraged ETFs aim to amplify returns — typically 2x or 3x the daily movement of the underlying index.

• Example: Not yet common in India but widely used in the US.

• Why invest: Short-term tactical plays to capture strong market trends.

• Ideal for: Experienced investors who understand leverage and risk.

While they can magnify profits, they also amplify losses, making them unsuitable for long-term holding.

8. Inverse ETFs

Inverse ETFs move in the opposite direction of their benchmark index. If the Nifty falls 1%, an inverse ETF tracking it may rise by 1%.

• Why invest: Useful for hedging portfolios during downturns.

• Ideal for: Investors expecting short-term market corrections.

In India, inverse ETFs are still limited, but globally they’re used by sophisticated investors as a cost-effective hedge instead of short-selling.

9. Smart Beta ETFs

These ETFs blend passive and active strategies. They track an index but weight components differently - often based on factors like volatility, value, momentum, or dividends.

• Example: Motilal Oswal Nifty 200 Momentum 30 ETF.

• Why invest: Seeks to outperform traditional market-cap-weighted indices.

• Ideal for: Investors looking for better risk-adjusted returns through rule-based strategies.

Smart beta products are increasingly popular among Indian HNIs and family offices seeking a middle ground between passive and active management.

10. Fund of ETFs

These invest in a basket of multiple ETFs, offering instant diversification across asset classes and geographies.

• Example: ICICI Prudential Asset Allocator Fund.

• Why invest: Simplifies portfolio management and rebalancing.

• Ideal for: Investors who prefer an all-in-one diversified solution.

How to Choose the Right ETF

When selecting ETFs, consider:

• Investment objective: Growth, income, or hedging.

• Expense ratio: Lower costs often mean better long-term returns.

• Liquidity: Look for ETFs with good trading volume.

• Tracking error: The smaller it is, the more closely the ETF mirrors its benchmark.

Consulting a financial advisor or wealth manager can help tailor ETF choices to your risk profile and goals.

Conclusion

The ETF universe has evolved far beyond traditional index tracking. Today’s investor can access sectors, regions, and even market views that were once reserved for institutional players.

Whether you’re looking to invest in clean energy, global tech, or simply hedge your portfolio, there’s an ETF built for your strategy. The key lies in understanding how each type works — and aligning it with your financial goals, time horizon, and risk appetite.

As India’s ETF market continues to deepen, the smart investor will not just participate but diversify with purpose.

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FAQs

1. Are ETFs better than mutual funds?

ETFs usually have lower costs and better liquidity, but mutual funds may be better for systematic investments (SIPs) and long-term goals.

2. Can Indian investors buy global ETFs?

Yes. Through international ETFs listed in India or via global investment platforms regulated under RBI’s Liberalized Remittance Scheme (LRS).

3. Are ETFs suitable for beginners?

Yes. Index ETFs are a great starting point because they are simple, diversified, and cost-effective.

4. Do ETFs pay dividends?

Some ETFs distribute dividends from underlying holdings, while others reinvest them back into the fund.

5. What is the tax treatment of ETFs in India?

Equity ETFs attract short-term capital gains tax of 15% (if held under one year) and long-term gains tax of 10%beyond ₹1 lakh. Debt ETFs are taxed as per debt fund rules.