Exchange-traded funds (ETFs) have been registering steady growth in India, with the investment community opting for safe investment options.
According to Koel Ghosh, Business Head – India, S&P BSE Indices, assets under management of ETFs amounted to ₹27,203 crore as on December 2016 — 35 times higher than it was three years ago. The shift was due to a few key developments which included the government’s decision to divest its stakes in companies via ETFs, a move which saw the government mopping up ₹3,000 crore.
Follows US footsteps“India as a market is closely following the trends in the US where the ETF has become a major attraction for investors, especially in pension funds,” she said. In India also, the Employees’ Provident Fund Organisation (EPFO) decided to start investing 5 per cent of its incremental cash inflow in equities via ETFs based on leading indices. This limit was further increased to 10 per cent. These developments certainly helped catch the attention of the small equity investors and the general public, Ghosh pointed out.
Passive investment managers choose a market or a segment of a market by investing in an index-based product that is designed to measure the performance of that market or segment. Key advantages of passive investing are that it aims to closely match the performance of its benchmark index with relatively low management costs. Furthermore, the risk of highly concentrated portfolios is lower in passive schemes, she said.
ETFs are transparent and low-cost. Due to relatively less portfolio turnover, ETFs save on transaction cost, besides the savings made on charges paid for active fund management.
Globally, it is observed that active MFs generally have expense ratio of between 1.5 per cent to 2.5 per cent, which is relatively high compared to the ETF expense ratio, which ranges between 0.07 per cent and 1 per cent.