What Are Active ETFs? How They Work, Risks and Availability in India

Most ETFs you may have seen in India follow an index. A Nifty 50 ETF, for example, is designed to track the Nifty 50 rather than choose stocks independently. Active ETFs work differently: a fund manager decides what the portfolio should hold to pursue the fund’s stated objective.

That combination of active management and exchange trading sounds appealing, but there is an India-specific detail to understand first. Active exchange traded funds exist in overseas markets; the ETF schemes described in SEBI’s current Indian scheme categories sit within its passive schemes framework. Here is what active ETFs mean, how they work elsewhere and how to assess the choices currently available to an Indian investor.

What is an active ETF?

An active ETF, or actively managed exchange-traded fund, pools investors’ money in a portfolio overseen by a fund manager. The manager chooses investments and can change them in line with the fund’s objective and permitted strategy. Investors buy and sell ETF units on an exchange.

An active ETF does not need to copy the holdings or weights of an index. Its objective might be to outperform a benchmark, seek income or provide a particular investment exposure. The objective tells you what the manager is trying to do; it does not promise that result.

The active part describes how the portfolio is managed. The ETF part describes how investors trade its units.

Source: US Securities and Exchange Commission, “Updated Investor Bulletin: Exchange-Traded Funds,” 23 February 2023.

How do active ETFs work?

The manager starts with the fund’s stated objective and investment rules. Within those rules, they research investments, decide what to buy or sell and review the portfolio as conditions change. A fund focused on shares, for instance, may change its holdings when the manager’s view of a company changes. A bond-focused strategy may adjust its holdings in response to its assessment of interest rates or credit risk.

The portfolio has a net asset value (NAV) based on the value of its assets and liabilities. ETF units also have an exchange price during trading hours. The two prices can differ, so the return an investor experiences depends partly on the price at which they buy and sell.

Portfolio changes are part of the active strategy, but they are not automatically a sign that the fund is doing well. Judge the outcome against the fund’s objective, relevant benchmark, risk and costs.

Source: US Securities and Exchange Commission, “Updated Investor Bulletin: Exchange-Traded Funds,” 23 February 2023.

Are active ETFs available in India?

This distinction matters if you are searching for an active ETF in India. SEBI’s February 2026 scheme categorisation lists index funds and ETFs within passive schemes and describes their investment in the securities of a particular index. The Indian ETF examples commonly available to retail investors are designed to track an index, an index-based rate or another specified underlying asset.

An ETF with a momentum, value or quality index in its name is not necessarily active. If it follows a rules-based index, decisions about which securities enter that index come from its methodology; the ETF’s role is to track it.

If a product is described to you as an active ETF, read its current scheme documents and exchange listing details to establish what it actually does. For active fund management through a domestic mutual fund, you can separately consider an actively managed mutual fund, where transactions generally take place at the applicable NAV rather than an intraday exchange price.

Source: SEBI, “Categorization and Rationalization of Mutual Fund Schemes,” 26 February 2026; SEBI Investor, “Understanding Exchange Traded Fund.”

What types of active ETFs exist?

Active ETFs in markets where they are offered can be grouped by what they invest in or what they aim to achieve:

• Equity active ETFs: Managers select and adjust a portfolio of shares.
• Bond active ETFs: Managers make decisions about debt securities within the fund’s mandate.
• Multi-asset active ETFs: Managers allocate across more than one asset class, subject to the fund’s rules.
• Objective-led active ETFs: A strategy may seek income, a particular market exposure or another stated outcome.

These are descriptions of strategies used internationally. They are not a list of active ETF categories available for purchase on Indian exchanges.

Source: US Securities and Exchange Commission, “Updated Investor Bulletin: Exchange-Traded Funds,” 23 February 2023.

Active ETFs vs passive ETFs: What is the difference?

Both structures use exchange-traded units. Their central difference is who, or what, determines the portfolio:

A passive ETF can hold an index built using sophisticated rules. That does not, by itself, turn the ETF into an actively managed fund.

Source: SEBI Investor, “Understanding Exchange Traded Fund” and “Understanding Tracking Error”; US Securities and Exchange Commission, “Updated Investor Bulletin: Exchange-Traded Funds,” 23 February 2023.

What are the benefits of active ETFs?

Where active ETFs are available, their appeal comes from combining a manager-led strategy with exchange trading:

• Manager-led decisions: The manager can adjust holdings within the fund’s mandate as their assessment changes.
• A choice of objectives: A strategy may aim for outperformance, income or a specified exposure.
• Exchange access: Investors can place orders during applicable market hours.
• Portfolio disclosure: Investors can review the holdings and other information published under the applicable market’s rules.

Each benefit depends on the specific product. Active management does not ensure better returns, and exchange access does not ensure a trade at your preferred price.

Source: US Securities and Exchange Commission, “Updated Investor Bulletin: Exchange-Traded Funds,” 23 February 2023.

What risks and costs should you consider?

Before investing in an active ETF, consider how the manager’s decisions, the portfolio’s holdings and the costs of holding and trading units could affect your returns:

• Manager risk: The manager’s choices can fall short of the fund’s objective or underperform a relevant benchmark.
• Market and concentration risk: The portfolio can lose value. A focused strategy may be more exposed to particular holdings, sectors or market conditions.
• Fund costs: Active research and portfolio management have costs. Compare the expense ratio with the strategy and results; do not assume every active ETF has the same fee.
• Trading costs: Brokerage and the bid-ask spread, the gap between the quoted buy and sell prices, can affect returns. An ETF’s exchange price may also be above or below its NAV.

These risks should be assessed together. A good period of performance alone does not show how much risk the manager took or what an investor paid to enter and exit.

Source: US Securities and Exchange Commission, “Updated Investor Bulletin: Exchange-Traded Funds,” 23 February 2023; SEBI Investor, “Understanding Exchange Traded Fund.”

How should you assess an active ETF or an alternative in India?

Start by checking what the product is, then whether it meets your goal:

1. Read the investment objective. Does it describe manager-led selection or tracking a specified index?
2. Check the permitted investments and holdings. Understand where your money can go and how concentrated the portfolio may be.
3. Compare performance appropriately. Review the relevant benchmark, the period shown, risks taken and the effect of expenses.
4. Add up the costs. Consider the expense ratio and, for an exchange-traded product, brokerage and the bid-ask spread.
5. Confirm how you transact. An ETF order executes at an available exchange price; a mutual fund purchase or redemption follows its applicable NAV rules.

For an Indian investor interested in active management, this assessment may lead to an actively managed mutual fund. If exchange trading is the priority, examine the objective of an available ETF without assuming that it is active.

How are active ETFs taxed?

There is no single Indian tax rate that follows from the words active ETF. Tax treatment depends on the fund’s structure, underlying investments, applicable law and the investor’s circumstances. An overseas active ETF also raises questions specific to the investment route and investor.

Check the tax treatment of the actual product before investing. Applying the tax rules for an Indian equity-oriented mutual fund to every active ETF or importing a tax benefit described for an overseas ETF, could give you the wrong answer.

Source: Income Tax Department, Income-tax Act, 2025.

The tax information in this article is based on prevailing laws at the time of publishing the article and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.

Conclusion

Active ETFs combine a manager’s investment decisions with units that trade on an exchange. You now know how that differs from an index-tracking ETF, why the fund’s objective matters and which costs and risks to examine. For investors in India, the first step is to check availability and the product’s scheme documents: the familiar Indian ETF framework is passive, while actively managed mutual funds provide a separate route to manager-led investing.

FAQs

How can I tell whether an ETF is active or passive?

Read its investment objective and strategy. A passive ETF aims to track a specified index or underlying asset; an active ETF gives its manager discretion to select holdings within a stated mandate. A factor or thematic name alone does not establish that an ETF is active.

Are active ETFs riskier than passive ETFs?

Neither label determines risk on its own. An active ETF adds the risk that its manager’s decisions will fall short, while the holdings, concentration, costs and trading conditions matter for either type. Compare specific funds rather than assuming one structure is always riskier.

How are active ETFs managed and rebalanced?

A manager reviews the portfolio and buys or sells investments when they judge it appropriate under the fund’s strategy. Unlike an index tracker, an active ETF need not wait for changes to an index before changing its holdings.

How can I track an active ETF’s performance and holdings?

Review the issuer’s published holdings, NAV, exchange price, expenses and performance information. Compare returns with a relevant benchmark over a suitable period, while checking how much risk the strategy took. The precise disclosure arrangements depend on the market and product.

Do active ETFs always try to beat an index?

No. Some seek to outperform a benchmark, while others pursue income, a particular exposure or another stated outcome. The fund’s investment objective tells you how to judge whether its strategy is doing what it set out to do.

Can I buy an active ETF in India through my demat account?

Do not assume an Indian-listed ETF is actively managed because its name describes a strategy. SEBI’s current categorisation places index funds and ETFs within passive schemes. Check the product’s scheme documents and listing before placing an order.

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