Exchange-traded funds, commonly referred to as ETF, have been available in India for many years. Yet, their adoption among retail investors remains limited when compared to stocks and traditional mutual funds. This gap is not necessarily due to product limitations, but more due to structural and behavioural factors.

Limited awareness and understanding

One of the main reasons ETF adoption remains low is limited awareness. Many investors are familiar with stocks and mutual funds because these products have been marketed consistently over decades. ETF structures, trading mechanisms, and pricing concepts such as intraday buying and selling are less understood. For many first-time investors, this learning curve creates hesitation.

Requirement of a demat and trading account

ETF investments require a demat and trading account, like stocks. Mutual funds, on the other hand, can be purchased directly using bank accounts and online platforms. This additional account requirement may discourage investors who prefer a simpler onboarding process, especially those investing small amounts regularly.

Liquidity concerns in some ETF categories

While ETFs are traded on stock exchanges, liquidity can vary across categories. Some ETFs may have lower trading volumes, which can result in wider bid ask spreads. This can impact execution prices, particularly for retail investors.

Preference for managed investment styles

Indian investors have traditionally preferred products where portfolio decisions are handled by fund managers. ETFs follow a passive structure, tracking an underlying index without active decisions. While this offers cost efficiency, some investors may feel more comfortable with managed approaches, especially during volatile market phases.

Limited availability for goal-based investing

Many investors invest based on specific goals such as retirement, education, or short-term needs. Mutual funds offer a wide range of categories that align with these objectives. ETFs, while expanding in scope, are still perceived as more suitable for market exposure rather than detailed financial planning.

Behavioural comfort and advisory influence

Investment behaviour is often shaped by familiarity and guidance. Advisors and distributors historically focused more on traditional mutual funds, which influenced investor choices. Over time, as awareness improves, ETF adoption may increase, but outcomes remain hypothetical and dependent on investor behaviour and market conditions.

Conclusion

ETFs are not unpopular due to lack of potential, but due to awareness gaps, structural requirements, and investor preferences. Understanding how an ETF fits within a broader asset allocation is important. Investors should consult with a financial planner or investment advisor before investing, to ensure alignment with long term goals and risk comfort.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.