What is Nifty ETF

A Nifty ETF is an investment product that allows investors to track the performance of the Nifty 50 index by investing in a single instrument. It combines the diversification of an index fund with the trading flexibility of a stock, making it a widely used option for passive investing in the Indian equity market.

A Nifty ETF, or Nifty 50 Exchange Traded Fund, is designed to replicate the performance of the Nifty 50 index, which represents the 50 largest and most liquid companies listed on Indian stock exchanges. The ETF holds the same stocks as the index in the same proportion, ensuring that its returns closely mirror the index’s movement.

Nifty ETFs are listed and traded on stock exchanges just like shares. Their prices fluctuate during market hours based on the net asset value (NAV) and market demand and supply. When the Nifty 50 rises or falls, the value of the Nifty ETF generally moves in the same direction.

There are different types of Nifty ETFs available to suit varied investor preferences and risk profiles. Each type tracks a specific segment or strategy within the broader Nifty universe.

Common types of Nifty ETFs include:

• Standard Nifty 50 ETFs
  These ETFs directly track the Nifty 50 index, which includes the major 50 large-cap companies listed on the NSE. They provide exposure to large-cap companies included in the Nifty 50 index, which are among the most actively traded stocks on the NSE.
  

• Nifty Next 50 ETFs
  These track the next set of large-cap companies ranked just below the Nifty 50. The index includes stocks that may exhibit higher price volatility compared to the Nifty 50.
  

• Sector-specific Nifty ETFs
  These ETFs focus on specific sectors such as banking, IT, FMCG, or energy within the Nifty framework. They provide exposure to specific sectors represented within the Nifty index framework.
  

• Factor-based Nifty ETFs
  These follow rule-based strategies such as low volatility, quality, value, or equal weighting instead of market-cap weighting. The aim is to capture specific investment factors rather than overall market movement.
   

Each type provides exposure to a different segment of the broader Nifty ecosystem, reflecting variations in index composition and weighting methodology.

Nifty ETFs has several features:

• Provide instant diversification across 50 major companies

• Lower expense ratios compared to actively managed funds

• Transparent portfolio aligned with the Nifty 50 index

• Can be traded on stock exchanges during market hours

• Commonly used for passive, long-term market-linked exposure
   

These features make Nifty ETFs accessible and efficient for many investors.

Despite their simplicity, Nifty ETFs carry certain risks:

• Market risk due to fluctuations in the Nifty 50 index

• Tracking error, where returns may slightly differ from the index

• Liquidity risk in ETFs with lower trading volumes

• No downside protection during market corrections
   

These risks form part of the characteristics of Nifty ETFs.

Trading mechanism of Nifty ETF involves a clear procedural process:

1. A demat and trading account is required with a registered intermediary.

2. Transactions depend on available funds in the linked bank account.

3. Nifty ETFs are located via the stock exchange or trading platform.

4. Orders are executed during market hours at prevailing exchange prices.

5. ETF units are recorded in the demat account after settlement.

The process is similar to what is used for equity shares.

Taxation on Nifty ETFs follows equity-oriented fund rules:

• Short-term capital gains apply if units are sold within one year.

• Long-term capital gains apply if units are held for more than one year.

• Dividends, if any, are taxed as per applicable income tax rules.

Tax treatment may vary based on holding period and individual tax status.

Nifty ETFs offer a simple and cost-effective way to gain exposure to India’s major companies through a single investment. They are often accessed by investors seeking passive returns linked to the broader market, with the flexibility of stock-like trading. Understanding their structure, risks, and taxation helps investors use Nifty ETFs more effectively as part of a diversified portfolio.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.