Best ETFs to Invest in 2025: A Complete Guide for Indian Investors

If you are looking for a simple way to invest in the stock market without choosing individual stocks, Exchange Traded Funds (ETFs) could be a good option. ETFs offer the benefit of diversification, are listed on stock exchanges, and are easily bought or sold, just like shares. In 2025, as Indian investors become increasingly interested in passive investing, choosing the best ETF funds India offers has become more relevant than ever.

This guide explains what ETFs are and how you can choose the best one:

What is an ETF?

An Exchange Traded Fund (ETF) is a basket of securities that tracks an index, commodity, sector, or other assets. In India, most ETFs track market indices, such as the Nifty 50 or Sensex. You can purchase or sell them on stock exchanges through your demat account, just like any other stock.

ETFs typically have lower expense ratios than actively managed mutual funds and offer a transparent investment approach, as their portfolios are disclosed daily.

How to choose the best ETFs in India

Here are some parameters you should compare when selecting the best ETF funds in India:

• Underlying index quality
  

Before selecting any ETF, your first step should be to research the underlying index it tracks. An ETF is only as good as the index it follows. Not all indices are created with the same purpose. For example, the Nifty 50 tracks large-cap companies, while the Nifty Next 50 covers the next rung of large caps. Some indices are sector-specific, while others follow themes like ESG or innovation. You should understand the weighting method, sector concentration, and company diversity within that index. A poorly constructed index with a high weight to a few stocks can increase risk. You must also consider how often the index is rebalanced.

• Tracking error consistency
  

Tracking error means the difference between the ETF’s return and its benchmark index’s return. A low tracking error indicates that the ETF is closely following the performance of its underlying index. However, do not judge an ETF only on the absolute number. You need to examine whether this tracking error is consistently low over time. Sudden jumps or drops in tracking error may suggest poor fund management, liquidity issues, or high turnover.

• Liquidity in the secondary market
  

Liquidity should not be confused with assets under management. Even if an ETF holds large assets, you may still face difficulty buying or selling units on the stock exchange if daily trading volume is low. Check the average daily traded value and the bid-ask spread. A wide spread indicates low liquidity, which may lead to poor price realisation while buying or selling. You should be able to enter and exit an ETF with minimal slippage. Additionally, liquidity becomes crucial during volatile market conditions. An ETF that cannot withstand volumes during periods of panic or euphoria may result in losses due to poor execution prices.

• Expense ratio
  

While a lower expense ratio is generally preferable, it must be compared to similar ETFs in the same category. For instance, when considering gold ETFs, compare the expense ratios of all gold ETFs in India. A fund charging 0.10% when peers charge 0.80% is significantly more cost-effective. However, you must ensure that the fund is not cutting corners in tracking efficiency or operations to offer lower costs. Examine the long-term performance net of expenses to determine if the low-cost ETF is delivering superior value.

• Size and age of the ETF
  

Pay attention to both the size (Assets Under Management) and the age (inception date) of the ETF. A newly launched ETF may not have sufficient historical data to assess its performance or efficiency accurately. Similarly, a small-sized ETF might be prone to higher costs, lower liquidity, or even closure risk. Larger and older ETFs tend to be more stable, better managed, and operationally efficient.

• Disclosure frequency
  

Unlike mutual funds, ETFs are expected to provide daily portfolio disclosures. However, not all fund houses offer this with the same level of clarity. You should verify how often the fund house updates the ETF’s holdings and whether the format is investor-friendly. Some funds publish detailed reports showing company names, weightages, and valuation metrics. Others may show the top 10 holdings. Transparency helps you understand the sector exposure, stock weightages, and overlap with your existing investments.

• Market maker support
  

ETFs in India rely on Authorised Participants (APs) or market makers to provide liquidity by creating or redeeming ETF units. If an ETF lacks reliable market maker support, you may struggle with execution, even if the ETF appears fundamentally sound. Poor AP participation can result in significant price deviations from the Net Asset Value (NAV) during trading hours. Check if the ETF has known APs and whether price quotes on the exchange closely follow NAV.

• Underlying asset accessibility

You should also consider whether the ETF provides access to assets that are difficult or expensive to purchase directly. For example, international equity ETFs, commodity ETFs (such as gold or silver), or debt ETFs (tracking government securities) offer convenience and diversification that is otherwise difficult to achieve. In such cases, the ETF becomes not just a passive vehicle but a gateway to untapped markets.

• Taxation

In India, ETFs are taxed based on type and holding period. For equity ETFs, short-term capital gains (STCG) under 12 months are taxed at 20%, while long-term gains (LTCG) beyond 12 months are taxed at 12.5% on gains exceeding ₹1.25 lakh. Debt ETFs are taxed according to the investor’s income slab, with no indexation benefit, regardless of the holding period. Gold ETFs attract slab-based STCG if held under 12 months, and 12.5% LTCG without indexation if held longer. Dividend income from ETFs is included in total revenue and taxed at the applicable slab rate. Additionally, TDS at 10% applies if the dividend exceeds ₹5,000 annually.

Conclusion

ETFs offer an affordable way to invest in various asset classes without selecting individual securities. You can access a range of ETFs that cover equities, sectors, gold, debt, and international markets. When deciding on the best ETF to invest in, consider factors such as tracking error, expense ratio, liquidity, and the structure of the underlying index. Once you understand these parameters and align them with your financial profile and risk appetite, you can make a well-balanced portfolio using ETFs.