Treat strategy-based ETFs as thematic funds

Start small, and if the idea generates returns, one can step up investment later

Exchange-traded funds (ETFs) don’t have many takers in India though they are popular in developed economies. One big reason: most actively managed funds offer much higher returns. Edelweiss Asset Management has launched a new ETF that has the potential to reverse the trend, according to the company.

Opened for subscription until May 20, Edelweiss ETF – Nifty Quality 30 doesn’t replicate the regular indices such as Nifty 50 or the Sensex. Instead, this fund tracks a strategy index called Nifty Quality 30, developed and maintained by National Stock Exchange’s subsidiary India Index Services & Products Limited. The index constitutes 30 companies, which are selected based on return on equity (ROE), debt-to-equity ratio and average change in profit after tax in previous three financial years.

To keep the index diversified, the 30 stocks are spread across nine broad sectors. It is re-balanced annually in October. The weight of each stock will be kept at maximum 10 per cent of the portfolio. In case the weight of a company goes beyond the prescribed limit, it will be adjusted in the next quarter. “If you look at the five-year performance of the index, it has fared better than most actively managed funds,” says Vikaas Sachdeva, CEO, Edelweiss Asset Management. For FY16, the index has outperformed 60 per cent of 106 diversified mutual fund schemes. In the past three years, it has outperformed 73 per cent funds and in five years, fared better than 90 per cent.

While ETFs are an important low-cost way to invest in equity, there are operational issues, according to Gaurav Mashruwala, a certified financial planner. He points out that an investor needs to have a demat account to buy ETFs and not many mutual fund investors have one. He also points out that if an individual tells brokers to do a systematic investment plan, the broker is only interested if the transaction value is high. “If the new products that mutual funds are adding to the ETF segment become popular, such operational issue would reduce,” Mashruwala says.

If investors wish to look at the Edelweiss’ strategy-based ETF, financial planners say they should realise they are narrowing their approach. A diversified mutual fund goes with multiple strategies and also have diverse universe of stocks. In this ETF, the stocks allocated to them are restricted. As the idea is new, one should invest in it like they invest in thematic funds. Investors should keep diversified funds at the core and a small portion of equity portfolio should be allocated to thematic and strategy ETFs. “Investors should start small and buy limited number of units. Over the long-term, if the idea pans out well, they can increase their investments later,” says Surya Bhatia, a certified financial planner.

If you decide to invest in the fund later through a stock exchange, you can go to the mutual fund’s website and see the indicative net asset value (NAV) or live NAV. This will give you the apt price you need to pay for each unit of the fund. “An individual can buy if the difference between the indicative NAV and price quoted on the exchange is not more than 35-40 basis points,” says Manas Shukla, head-ETFs at Edelweiss Asset Management.