First time in 10 years: ETF AUM growth falls behind MF industry in 2023

The last time ETFs trailed the mutual fund industry was in 2013, when the ETF AUM had declined 11 per cent despite the industry's assets growing 9 per cent

Exchange traded funds (ETFs), one of the two channels for passive investing in mutual funds (MF), are set to lag behind the overall MF industry in terms of asset growth for the first time in 10 years. The assets under management (AUM) of ETFs have gone up 17 per cent in 2023 so far vis-a-vis a 23 per cent growth in the overall MF AUM (till November).

The last time ETFs trailed the MF industry was in 2013, when the ETF AUM had declined 11 per cent, despite the industry's assets growing 9 per cent.

Passive funds, which include ETFs and index funds, have been a fast-growing space within the MF industry, especially post Covid-19. Their AUM, which stood at Rs 1.85 trillion in December 2019, rose to Rs 6.3 trillion by the end of 2022, surging over 30 per cent each year during the period. In 2023, the passive AUM growth is marginally lower than that of the industry at 22 per cent.

 

Though ETFs have started to gain traction from retail investors, the product is still mostly used by institutional investors with the Employees' Provident Fund Organisation (EPFO) being the largest client. According to provisional data shared by the government in Parliament recently, EPFO had invested Rs 27,105 crore in ETFs in FY 2024 by the end of October vis-a-vis Rs 53,081 crore in FY 2023.

As per MF executives, the slowdown in ETF AUM growth is likely due to a decline in EPFO flows or redemptions by the retirement fund body. The other reason, they cite, is the change in debt fund taxation, which has hit inflows across debt schemes, including debt ETFs. The growing asset base of ETFs is also a factor.

EPFO invests in ETFs tracking the National Stock Exchange Nifty50 and the S&P BSE Sensex. Some portion of its equity corpus also goes into CPSE and Bharat 22 ETFs.

At the end of October 2023, equity-oriented ETFs had an AUM of Rs 4.5 trillion, while debt ETFs were managing Rs 90,130 crore. At the start of the calendar year, equity ETF AUM stood at Rs 4.1 trillion and debt ETF AUM was Rs 83,700 crore, shows data from the Association of Mutual Funds in India.

Index funds have grown 48 per cent in 2023 to Rs 1.9 trillion. In 2022 and 2021, their AUM had almost tripled. Index funds have a higher retail participation compared to ETFs. The growing interest in passive funds in recent years is underpinned by lower costs and fund managers' failure to outperform consistently in certain categories.