MFs increase focus on exchange-traded funds

Mutual fund houses are looking to grow their product portfolio by expanding their range of index-based exchange-traded funds (ETFs). 

SBI Mutual Fund, Reliance Mutual Fund, ICICI Prudential Mutual Fund, Kotak Mutual Fund and Edelweiss Mutual Fund are some of the fund houses who have launched or are looking to launch ETFs.

As the industry focuses on bringing down the cost of managing funds for the benefit of investors, officials say development of ETF-product basket serves to fulfil this purpose.

The capital market regulator, Sebi, has been asking the industry to better-manage costs and recently mandated fund houses to fix an upper limit on the commission paid to distributors of mutual funds.

"ETFs are cost-efficient both for the fund houses and investors. In this scenario, when the markets are moving up, the returns generated by the ETF will be higher than those given by the diversified actively managed equity funds because of the low costs," said Dinesh Khara, CEO and MD, SBI Mutual Fund.

An actively managed equity fund can charge expenses of upto 2.5% of the total corpus under the fund. While for ETFs the expenses deducted is usually anywhere between 50-100 basis points. The larger the ETF, the lower the cost.

Most fund houses are looking at launching funds indexed to the Sensex and the Nifty. But some are also considering ETFs based on sectors like the Bank Nifty and other smaller indices like the Nifty Junior. SBI has also applied for an ETF based on the 10-year government bonds, as per filings on the Sebi website.

However, ETFs as a product-category have so far not found much favour among investors because of the lack of awareness and a reluctance to push the products as it is a low-return product for the fund house. Of the total assets in the MF industry, less than 2% are invested in ETFs. Of these, a majority have been into gold ETFs. 

ETFs contribute to less than half a per cent of all equity investment.