Fixed income ETFs may soon be available in India

Exchange-traded funds (ETFs) on fixed income, which manage $200 billion globally, may soon be available here, if the market regulator has its way. The Securities and Exchange Board of India (Sebi) wants fund houses to attract the untapped mass of risk-averse small investors through these low-risk and low-cost products.

At a conference on ETFs last week, K N Vaidyanathan, executive director, Sebi, said, “We need to think about how to bring this vast majority of savers to get a little more productive in their investments. Initially, may be through the debt route or the liquid investment route. Why does the realm of ETFs stick to equities or gold? Why haven’t we thought of ETFs, say, around a liquid fund, which will make the concept very easy for anybody to relate to as a sweet product?”

Indians are among the most avid savers in the world, saving nearly one-third of their income every year. However, most of this saving is held in bank fixed deposits and other fixed income products. Even after 15 years of existence, mutual funds have not been able to increase their penetration beyond the big cities. Less than two per cent of the population invest in mutual funds, which have been focusing largely on selling high-risk equity products to small investors.

According to Vaidyanathan, the adage that ‘equities are for retail, debt is for institutions’ does not make sense.

“The highest risk product is for retail. The lowest risk product is for institutional investors. Somewhere, we got that mix wrong,” he said. “Do you want to make 50 basis points on a Rs 10,000-crore corpus or two per cent on a Rs 100-crore corpus?” he asked.

Fixed income ETFs have become a rage in West, especially after the collapse of Lehman Brothers in 2008, as investors put safety of capital before returns. However, in India, the concept is in its infancy. Fundhouses like Benchmark and Motilal Oswal AMC are looking at ways to break ground in this untapped segment in India.

“We are evaluating it,” said Nitin Rakesh, CEO, Motilal Oswal Asset Management, which is positioning itself as a ETF fund house. “Globally, fixed income ETFs are the fastest growing after the 2008 crisis. There are ETFs on money market, corporate bonds, etc. It’s a $200-billion market now,” he added.

According to him, several simple issues need to be figured out. Fund houses are looking for regulatory guidance on how ETFs would function, as there are no tradeable fixed income indices in India. If the fund is going to actively manage underlying securities in the absence of an index, then it may lose out on the transparency which is an USP of ETFs. Most Indian ETFs have a fixed basket of securities which they trade on, like the equity indices or gold.

Benchmark AMC, India’s largest AMC focusing on ETFs, has already filed offer documents for a Gilt ETF that will have 10-year government securities as underlying. It is waiting for clearances from Sebi. When asked if the public statement means the product will be cleared soon, Sanjiv Shah of Benchmark said, “I hope so.” But he was not very sure if ETFs can bring in huge number of retail investors. “Retail participation has traditionally been through bank deposits,” Shah said.