MFs look to cash-in on EPFO allocation

With the government opening the pension kitty for investment in equities, mutual fund houses are queuing up with ETF (exchange traded fund) launches.

Recently, the Employees’ Provident Fund Organisation (EPFO) had said it might invest up to five per cent of its incremental corpus in equities this financial year, through ETFs. According to reports, this could lead to inflows of about Rs 5,000 crore into equities.

SBI Mutual Fund, Reliance Mutual Fund, ICICI Prudential Mutual Fund, Kotak Mutual Fund and Edelweiss Mutual Fund are some of the fund houses that have launched or are preparing to launch ETFs within the next year. Most fund houses are looking at launching funds indexed to the Sensex and the Nifty. Some are also considering ETFs based on the Bank Nifty and smaller indices such as the Nifty Junior. SBI has applied for an ETF based on 10-year government bonds, according to filings on the Securities and Exchange Board of India’s website.

“As an asset management company, our products are available for all investor categories, including those of the EPFO. It is a great opportunity for the mutual fund sector and if the EPFO does start investing, it will have a huge impact on the ETF segment,” said Sundeep Sikka, chief executive of Reliance Mutual Fund.

Some fund houses are, however, awaiting clarity on the type of ETFs that could be invested in. “It is a welcome move but we still have to see what kind of ETFs would qualify. We would like to explore that opportunity but only once the guidelines are clear,” said Aashish Somaiyaa, chief executive of Motilal Oswal AMC.

Besides, the EPFO’s corpus would bring in higher institutional participation in the form of pension funds, too. The Insurance Regulatory and Development Authority of India has already allowed insurers to invest through ETFs.

As of March this year, overall assets under management under equity ETFs stood at Rs 8,060 crore, up 78 per cent compared to a year earlier (Rs 4,528 crore). Analysts said the rise was primarily due to a rise in market valuations, as retail participation hadn’t seen a significant jump in this segment.

“Most of the ETF money is in gold ETFs but with returns dwindling there as well, retail participants have chosen to stay away from these. The inclusion of ETFs into the EPFO fold could lead to higher participation by retail players. The ETF route is the most cost-efficient method of managing money available in the mutual fund space,” said Dhirendra Kumar, chief executive of Value Research, a mutual fund tracker.

For the benefit of investors, Sebi has mandated the sector to cut the cost of managing funds. “ETFs are cost-efficient both for fund houses and investors. Considering this, when markets are moving up, the returns generated by ETFs will be higher than those given by diversified actively managed equity funds, owing to low costs,” said Dinesh Khara, chief executive and managing director, SBI Mutual Fund.

An actively-managed equity fund can charge up to 2.5 per cent of the fund’s total corpus. For ETFs, the expense deducted is usually 50-100 basis points.

So far, ETFs haven’t found much favour with investors because of a lack of awareness and reluctance to push products (these are low-return products for fund houses). Of the overall assets in the mutual fund sector, about 1.5 per cent is invested in ETFs. Of these, a majority are in gold ETFs.

ETFs contribute to 2.6% of all equity investment.