Equity ETFs: shunned locally, loved abroad

Indian equity ETFs abroad have more than ten times the assets of local counterparts

Exchange traded funds based on Indian equities seem to be more popular abroad than they are locally. The assets of such funds abroad are now at more than ten times the assets of similar funds in India. 

 

Foreign ETFs' assets under management (AUM) are in excess of Rs 56,000 crore. 

 

The CEO of one of the largest local asset managemet company pointed out that passively managed ETFs try to mirror benchmark index returns. Actively managed Indian funds instead give higher returns than the benchmark index. Hence, ETFs get limited traction here. 

 

Interestingly, local AMCs also seem to be staying away from setting up such funds abroad, according to an analysis of Bloomberg data.

An industry-watcher said that tax rules may have had a role in the same since companies with a fund manager based in India were subject to higher tax liabilities than offshore funds. 

 

"This meant that a fund manager would have to be based abroad to execute orders, thus adding to the operational issues that they have to deal with. This could have had an impact on Indian asset managers' willingness to launch such funds abroad, even if the role of a designated fund manager in such funds is nominal. One might see a change after the recent budget announcement easing these rules," he said. 

 

Most of these foreign ETFs have institutional money, said the person quoted above. These investors look to take a short-term exposure to India, using ETFs as the expenses are lower at 80 basis points compared to 1.5-2% for an actively managed fund. Also, there is no exit load in the case of an ETF. 

 

An exit load is a fee that the investor pays if he exits the fund before a certain period of time, say one year.