The National Stock Exchange reported that ETF trading volume has been on the rise over the years. One popular ETF category is the Nifty 50 ETFs, which is the most actively traded category. But why are these ETFs gaining traction? Let’s understand in this article.
Factors Contributing to the Popularity of Nifty 50 ETFs
Here are seven factors that have made Nifty 50 ETFs popular:
Low Expense Ratio Advantage
The reason for the low expense ratio is simple: there is no fund manager actively picking stocks. Instead, the ETF just tracks the Nifty 50 index. Suppose you invest ₹5 lakh in an actively managed mutual fund with a 1.5% annual expense ratio. You would lose ₹7,500 every year to fees. In contrast, a Nifty 50 ETF might charge just 0.05%, costing you only ₹250. Over five years, the savings can compound substantially.
Trading Flexibility
Unlike mutual funds that process buy or sell requests only at the end of the day, Nifty 50 ETFs trade like regular stocks during market hours. You can place a market or limit order, set stop losses, or buy on dips. Suppose you notice the Nifty dipping by 1.2% in the morning due to global cues. You can immediately invest in a Nifty 50 ETF at that lower level, locking in gains if the index rebounds by afternoon.
Affordable Diversification
By investing in a single Nifty 50 ETF unit, you are spreading your money across 50 of the country’s top companies. Suppose you are a new investor with ₹10,000. Buying individual stocks like TCS or Titan might consume your full budget. But one ETF unit might cost around ₹200, letting you gradually build exposure to the full index. This makes diversification affordable.
No Lock-in Period
If that amount is invested in an equity mutual fund, there could be a 1% exit load if redeemed within a year. However, with ETFs, you can sell immediately on the exchange with no such restrictions. This liquidity adds to your financial flexibility.
Low Tracking Error
Top-performing Nifty 50 ETFs report tracking errors as low as 0.03%. This metric measures the degree to which an ETF tracks the Nifty 50 index. A low tracking error ensures that investors receive returns nearly identical to those of the index, which is crucial for passive strategies.
In contrast, actively managed funds often deviate due to discretionary stock selection, increasing risk and unpredictability.
Tax Perks
In 2025, SEBI introduced reforms that taxed long-term capital gains from equity ETFs at a flat rate of 12.5% beyond an annual exemption of ₹1.25 lakh. This is significantly lower than the 20% rate applicable to short-term gains and debt funds, which are treated as per the slab rate.
Additionally, dividends from ETFs remain tax-free at the fund level, enhancing post-tax yield.
These regulatory shifts have made Nifty 50 ETFs more tax-efficient than traditional mutual funds and ULIPs.
Margin Pledge Eligibility
Leading Nifty 50 ETFs offer up to 94% margin pledge eligibility. This feature allows investors to pledge ETF units as collateral for margin trading or loan facilities. Compared to stocks, which often attract higher haircut rates, ETFs provide superior capital efficiency.
Conclusion
In 2025, Nifty 50 ETFs are gaining popularity due to their low costs, easy trading, tax benefits, and liquidity. They offer affordable diversification, minimal tracking error, and even margin pledge options. For both new and seasoned investors, these ETFs combine convenience with cost-efficiency, making them a smart choice in India’s growing and maturing ETF market.