You are here: Home » Markets » News
Business Standard

Exchange traded funds gain traction

Lower fees attract assets for passively managed funds

Sneha Padiyath  |  Mumbai 

The volume of exchange-traded funds (ETFs) has been steadily moving up since the beginning of the year, on higher participation from retail and high net worth investors (HNIs), though the rise has been less spectacular than for actively traded funds.

ETFs are passive funds which track the performance of an index on a real-time basis. These charge lower fund management fees than other actively managed equity products and enjoy higher liquidity. They can be bought and sold on a stock exchange, like shares.

While assets of actively managed funds are up 15 per cent in the past six months, ETFs have seen a nine per cent rise, both on the back of a rise in the markets and higher retail participation. The assets under management touched Rs 7,322 crore in June, up from Rs 6,702 crore in December 2014. While ETFs are less than five per cent of the product category, sector officials said there were indications of rising interest.

Other than retail and HNI participants, institutional investors have also been actively participating in these, due to their management fees. “A large portion of the money is also coming from insurance companies, investing mainly in banking ETFs,” said Vikaas M Sachdeva, chief executive, Edelweiss Mutual Fund.

By Insurance Regulation and Development Authority of India rules, no insurance company is allowed to invest in funds where the expense ratio is above 49 basis points (bps). That of most ETFs is capped at 49 bps, sector officials said. The average expense ratio of an ETF is 30-40 bps.

Fund houses have also increased their focus on this category of funds, as they believe it is under-serviced. Opening of the provident fund segment to MFs could bolster the growth of this category, experts said. The Employees Provident Fund Organisation plans to invest in mutual funds' ETFs.

Interestingly, the pick-up in passively managed ETFs comes even as actively managed ones have beaten their benchmarks. U K Sinha, chairman of the Securities and Exchange Board of India, said at a recent event that 93 per cent of actively managed funds’ assets had given higher than benchmark returns over the past three years.


WHY ETFs ARE ON THE RISE
  • Actively managed funds have beaten benchmarks
  • But expense ratios are lower for ETFs
  • Many institutions prefer taking equity exposure through passive funds
  • They believe it reduces performance risk
  • Assets have risen around 9 per cent in the first half of the year

Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Fri, July 10 2015. 22:31 IST
RECOMMENDED FOR YOU
.