Globally, active fund managers are failing to beat the benchmark. This, in turn, has led to a rise in the popularity of exchange-traded funds (ETFs). As their name suggests, ETF is an investment fund traded on stock exchanges, much like stocks.
Similar to mutual funds, ETFs pool money from many investors to invest in a basket of stocks, bonds or commodities. Like a stock or bond, ETFs are traded on real-time basis with their price fluctuating throughout the day in line with the underlying investments.
In India, there are 71 ETFs benchmarked to various equity and debt indices with total AUM of nearly Rs 1.47 lakh crore. The first ETF in India was launched in December 2001 and was benchmarked to Nifty50.
Equity and debt ETFS – Number of schemes and AUM:
|
ETF/FY |
Mar 13 |
Mar 14 |
Mar 15 |
Mar 16 |
Mar 17 |
Mar 18 |
Mar 19 |
Sep 19 |
|
AUM (Rs Cr.) |
1476 |
4528 |
8060 |
16063 |
44436 |
72888 |
134626 |
1,47,187 |
|
# of ETFs |
23 |
26 |
34 |
45 |
51 |
56 |
66 |
71 |
Source –AMFI
Recently, experts of the Indian MF industry gathered at NSE India ETF Conference 2019 and discussed challenges and opportunities of ETFs. To begin with, the panel weighed in on whether ETFs are the best investment vehicles for passive investing.
A Balasubramanian, MD & CEO, Aditya Birla Sun Life AMC said that retail investors in India prefer to deploy their cash in index funds to ETFs. This is because index funds are easier to access. While investing in index funds does not require a demat account, ETFs need a demat account to hold and transact units.
Aashish P Sommaiyaa, MD & CEO, Motilal Oswal AMC seconded Bala’s argument and said that at this point he in the camp of index funds. He added that index mutual funds do not require investors to pay a commission to a brokerage company, but ETFs do.
Moreover, Bala said that retail investors are not worried about the difference between the intra-day price they would get by investing in ETFs and the day-end NAV they would get by investing in index funds.
As ETFs are listed on stock exchanges, ETFs can be bought and sold both on the stock exchange or the issuing mutual fund. As such, it can help an investor on a volatile day.
Index funds, on the other hand, can be bought or redeemed at the day-end NAV. This means investors cannot profit from intra-day index volatility.
Manooj Mistry, Head of ETFs and Index Investing, DWS, UK added that given this difference between ETFs and index funds, tactical investors prefer ETFs, whereas average investors opt for index funds.
Vetri Subramaniam, Group President & Head of Equity-UTI AMC added that currently index funds are more preferable than ETFs. However, once the market evolves it will give ETFs ample space to grow.
On the debate of active funds versus passive funds debate, all panellists concluded that the talking point should be asset allocation of an investor’s portfolio. Hence, it should not be either active or passive funds but both active and passive funds.
