Exchange traded funds gain traction

Lower fees attract assets for passively managed funds

The volume of exchange-traded funds (ETFs) has been steadily moving up since the beginning of the year, on higher participation from retail and high net worth investors (HNIs), though the rise has been less spectacular than for actively traded funds.

ETFs are passive funds which track the performance of an index on a real-time basis. These charge lower fund management fees than other actively managed equity products and enjoy higher liquidity. They can be bought and sold on a stock exchange, like shares.

While assets of actively managed funds are up 15 per cent in the past six months, ETFs have seen a nine per cent rise, both on the back of a rise in the markets and higher retail participation. The assets under management touched Rs 7,322 crore in June, up from Rs 6,702 crore in December 2014. While ETFs are less than five per cent of the product category, sector officials said there were indications of rising interest.

Other than retail and HNI participants, institutional investors have also been actively participating in these, due to their management fees. “A large portion of the money is also coming from insurance companies, investing mainly in banking ETFs,” said Vikaas M Sachdeva, chief executive, Edelweiss Mutual Fund.

By Insurance Regulation and Development Authority of India rules, no insurance company is allowed to invest in funds where the expense ratio is above 49 basis points (bps). That of most ETFs is capped at 49 bps, sector officials said. The average expense ratio of an ETF is 30-40 bps.

 

Fund houses have also increased their focus on this category of funds, as they believe it is under-serviced. Opening of the provident fund segment to MFs could bolster the growth of this category, experts said. The Employees Provident Fund Organisation plans to invest in mutual funds' ETFs.

Interestingly, the pick-up in passively managed ETFs comes even as actively managed ones have beaten their benchmarks. U K Sinha, chairman of the Securities and Exchange Board of India, said at a recent event that 93 per cent of actively managed funds’ assets had given higher than benchmark returns over the past three years.
WHY ETFs ARE ON THE RISE

• Actively managed funds have beaten benchmarks
• But expense ratios are lower for ETFs
• Many institutions prefer taking equity exposure through passive funds
• They believe it reduces performance risk
• Assets have risen around 9 per cent in the first half of the year