Now, ETFs facing redemption heat

Exchange-traded funds (ETFs) have emerged as the latest category of mutual funds to have felt the heat of redemptions, with investors having withdrawn over Rs 1,000 crore from October 2008 to January-end this year, according to data available with the Association of Mutual Funds in India (Amfi).

At the end of September 2008, the AAUM of ETFs were Rs 3,369 crore. This fell by 56 per cent to Rs 1,461 crore by January-end this year. In comparison, the AAUM of equity funds fell from Rs 129,699 crore to Rs 93,828 crore in the same period – a fall 27 per cent.

Redemptions in ETFs are a rare sight because the units are traded on the stock exchanges, implying that for every seller, there obviously has to be a corresponding buyer.

A fund house can step in and purchase the units to create liquidity for the fund, but only in a situation where buyers are absent. And when the fund house buys back such units, the transaction gets classified as a ‘redemption’.

According to sources, a lot of high networth individuals (HNIs) and institutions who trade in ETFs had offloaded these funds in the last few months. Industry experts attributed this huge redemption pressure to the worsening equity markets.

“Since the underlying assets were in a bad shape, people realised that it was better to switch to debt funds rather than staying invested in equity ETFs,” India Infoline’s Head (Distribution) Vinay Shukla said.

Benchmark Mutual Fund, a fund house which specialises in ETFs, had seen its average assets under management (AAUM) shrink from Rs 3,904 crore at September-end 2008 to Rs 1,903 by January-end this year. In fact, its assets fell further to Rs 1,475 crore by the end of last month.

While Benchmark refused to comment on the development, distributors pointed out that net assets of several of its schemes have halved in value. Sample this: Banking Bees, which had an AAUM of Rs 2,744 crore in September 2008, was left with Rs 559 crore by January.