The Central Public Sector Enterprises ETF will start accepting subscriptions starting on Tuesday with an aim to raise as much as 30 billion rupees ($490.46 million) by March 21.
The ETF will target mainly retail investors, although the fund will also be sold to institutional and foreign investors.
The ETF is an important part of the government's target to sell stakes in state-owned companies worth 160.3 billion Indian rupees ($2.62 billion) by the year ending March so India can meet its revised fiscal deficit target of 4.6 percent of gross domestic product.
"This ETF will give the government a new vehicle to sell stakes (in state-owned companies)," said Alok Tandon, joint secretary in the Department of Disinvestment at a news conference on Friday.
"We're hopeful of good retail investor response."
A senior official in the finance ministry dealing with stake sales said the government has already raised 74.78 billion rupees as part of its disinvestment drive this year.
Tandon also said on Friday that India was aiming to raise an additional 30-40 billion rupees via the sale of a stake held by a state-run trust fund in Axis Bank Ltd.
Analysts have said that the ETF could better help the government divest its stakes in some of the public sector companies by pairing blue chips such as Oil and Natural Gas Corp Ltd (ONGC) with relatively smaller and financially weaker ones.
Finance Minister P. Chidambaram had first announced plans to introduce the ETF last year, but volatile markets have delayed the launch and also forced it to lower its disinvestment target from the previous 400 billion rupees.
The launch comes as the broader NSE index has rallied this month to record highs. But the individual performances of companies in the ETF have varied, including a gain of around 12 percent so far this year for ONGC, but a fall of around 9 percent in Coal India Ltd.
ETFs for retail investors have traditionally struggled in India despite their low management fees.
Equity ETFs had just about $225 million in assets under management as of the end of February, or less than 1 percent of the $150 billion held by domestic funds, according to data from Association of Mutual Funds in India. ($1 = 61.1675 Indian Rupees) (Additional reporting by Archana Narayanan in MUMBAI; Editing by Rafael Nam & Kim Coghill)