Exchange Traded Funds (ETFs) have become an increasingly popular investment tool in India, capturing a significant share of the Mutual Fund Industry’s assets under management (AUM).
According to a study by Zerodha, ETFs now hold 13 percent, or Rs 6.95 lakh crore, of the total AUM of Rs 53.40 lakh crore.
This article delves into the factors driving this surge in popularity, the types of ETFs available in India, their advantages, and the emerging trends within the ETF market.
The Surge in ETF Popularity
Dramatic Rise in ETF Accounts
The number of ETF accounts in India has seen a dramatic rise since 2017. The number of equity and debt ETF accounts has more than doubled, jumping from 5.33 lakh in 2017 to a staggering 1.25 crore in 2023.
This growth signifies a growing comfort level and understanding of ETFs among retail investors. The increasing awareness and education about the benefits of ETFs have contributed to their widespread adoption.
Significant Share of Mutual Fund Industry AUM
ETFs now hold a significant share of the total Mutual Fund Industry AUM, amounting to Rs 6.95 lakh crore. This represents 13 percent of the total AUM, highlighting the growing importance of ETFs in the investment landscape.
The shift towards ETFs is driven by their cost-effectiveness, diversification benefits, and ease of trading.
Understanding ETFs
What are ETFs?
ETFs are a type of investment tool that offers a basket of assets like stocks, bonds, or commodities. They trade on stock exchanges similar to individual stocks but function like mutual funds in terms of diversification.
ETFs combine the best features of both stocks and mutual funds, providing investors with a versatile investment option.
Types of ETFs in India
Equity ETFs: These track a particular stock market index, such as the Nifty 50 or Sensex. They provide exposure to a broad range of stocks within the index, offering diversification and reducing the risk associated with individual stocks.
Debt ETFs: These invest in government or corporate bonds, providing a fixed income investment option. Debt ETFs are suitable for conservative investors seeking stable returns with lower risk.
Gold ETFs: These track the price of gold, offering exposure to the gold market without the need to physically hold the metal. Gold ETFs are popular among investors looking to hedge against inflation and economic uncertainty.
Global ETFs: These invest in international stocks or a combination of assets from various countries. Global ETFs provide diversification across different markets and can help mitigate country-specific risks.
Smart Beta ETFs: These track alternative indexes based on factors like value, momentum, or low volatility. Smart Beta ETFs aim to outperform traditional market-cap-weighted indexes by focusing on specific investment strategies.
Advantages of ETFs
Lower Costs
Compared to actively managed mutual funds, ETFs typically have lower expense ratios. The passive management approach of ETFs, which involves tracking an index rather than actively selecting securities, results in lower management fees.
This cost advantage translates to more money staying in investors’ pockets, enhancing their overall returns.
Diversification
ETFs provide instant diversification across a basket of assets, allowing investors to spread their risk and potentially improve returns.
By investing in an ETF, investors gain exposure to a broad range of securities within a single transaction. This diversification helps mitigate the impact of poor performance by individual securities.
Transparency
ETFs trade on stock exchanges throughout the day, offering price transparency and real-time liquidity. Unlike mutual funds, which are priced at the end of the trading day, ETFs can be bought and sold at market prices during trading hours. This transparency allows investors to track their investments and make informed decisions.
Convenience
Similar to individual stocks, ETFs can be easily bought and sold on the stock exchange. Investors can trade ETFs through their brokerage accounts, making them accessible and convenient investment options. The ease of trading ETFs allows investors to quickly adjust their portfolios in response to market conditions.
Trends in the ETF Market
Concentration in Popular Equity ETFs
The study by Zerodha reveals a trend towards concentration within the popular Equity ETF segment. Over 99% of the total AUM among broad indices in Equity ETF schemes is concentrated in just three major indexes: Nifty 50 ETF, Nifty Next 50 ETF, and Nifty Midcap 150 ETF. This concentration indicates that investors prefer well-established indexes with a proven track record.
Growth in Retail Participation
The rise in the number of ETF accounts reflects increased participation from retail investors. This trend is driven by growing awareness of the benefits of ETFs and the availability of educational resources. Retail investors are becoming more comfortable with the idea of passive investing and are looking to ETFs as a cost-effective way to build diversified portfolios.
Innovation in ETF Offerings
The ETF market in India is witnessing innovation with the introduction of new products. Fund houses are launching ETFs that cater to specific investment themes, such as sector-specific ETFs, thematic ETFs, and ESG (Environmental, Social, and Governance) ETFs. These innovative offerings provide investors with more options to align their investments with their preferences and goals.
Institutional Adoption
Institutional investors, including pension funds, insurance companies, and asset managers, are increasingly adopting ETFs. The liquidity, transparency, and cost-effectiveness of ETFs make them attractive for institutional portfolios. The growing institutional adoption further strengthens the ETF market and contributes to its overall growth.
Case Study: The Success of Equity ETFs
Nifty 50 ETF
The Nifty 50 ETF is one of the most popular and widely traded ETFs in India. It tracks the Nifty 50 index, which comprises the 50 largest and most liquid companies listed on the National Stock Exchange (NSE). The Nifty 50 ETF provides investors with exposure to a diversified portfolio of blue-chip stocks, making it a core holding for many investors.
Nifty Next 50 ETF
The Nifty Next 50 ETF tracks the Nifty Next 50 index, which includes the 50 largest companies outside the Nifty 50 index. This ETF offers investors exposure to mid-cap stocks with the potential for high growth. The Nifty Next 50 ETF has gained popularity among investors seeking to capture the growth potential of emerging companies.
Nifty Midcap 150 ETF
The Nifty Midcap 150 ETF tracks the Nifty Midcap 150 index, which comprises 150 mid-cap companies. This ETF provides investors with exposure to a broader range of mid-cap stocks, offering a balance between growth and stability. The Nifty Midcap 150 ETF is suitable for investors looking to diversify their portfolios with mid-cap stocks.
Impact of ETFs on the Mutual Fund Industry
Shift Towards Passive Investing
The rise of ETFs signifies a shift towards passive investing in the mutual fund industry. Investors are increasingly recognizing the benefits of passive management, such as lower costs, diversification, and transparency. This shift is challenging the traditional dominance of actively managed mutual funds and prompting fund houses to expand their ETF offerings.
Competition and Innovation
The growing popularity of ETFs is driving competition and innovation within the mutual fund industry. Fund houses are developing new ETF products to cater to diverse investor needs and preferences. This competition is leading to the introduction of innovative ETFs, such as factor-based ETFs, sector-specific ETFs, and international ETFs, providing investors with a wider range of investment options.
Enhanced Market Efficiency
ETFs contribute to enhanced market efficiency by facilitating price discovery and liquidity. The ability to trade ETFs throughout the day allows investors to react quickly to market developments, improving overall market efficiency. Additionally, the arbitrage mechanism in ETFs helps align the ETF price with the net asset value (NAV) of the underlying assets, reducing pricing discrepancies.
The Future of ETFs in India
Continued Growth and Adoption
The ETF market in India is expected to continue its growth trajectory, driven by increasing investor awareness, expanding product offerings, and institutional adoption. As more investors recognize the benefits of ETFs, their adoption is likely to increase, further boosting the market.
Regulatory Support
Supportive regulatory frameworks play a crucial role in the growth of the ETF market. The Securities and Exchange Board of India (SEBI) has been proactive in promoting ETFs by simplifying regulations and enhancing investor protection. Continued regulatory support will be essential for the sustained growth and development of the ETF market.
Integration with Technology
Technological advancements are transforming the investment landscape, and ETFs are no exception. The integration of technology, such as robo-advisors and digital platforms, is making it easier for investors to access and trade ETFs. These technological innovations are enhancing the accessibility and convenience of ETFs, driving their adoption among tech-savvy investors.
Education and Awareness
Investor education and awareness are critical for the growth of the ETF market. Financial institutions, regulators, and industry bodies need to continue their efforts to educate investors about the benefits and risks of ETFs. Providing comprehensive educational resources and conducting investor awareness programs can help build investor confidence and promote informed decision-making.
The rising popularity of Exchange Traded Funds (ETFs) in India reflects a significant shift in the investment landscape.
With a significant share of the Mutual Fund Industry AUM and a dramatic rise in the number of ETF accounts, ETFs are becoming a preferred investment option for retail and institutional investors alike.
The cost advantages, diversification benefits, transparency, and convenience offered by ETFs are driving their widespread adoption.
As the ETF market continues to evolve, innovation, competition, and regulatory support will play crucial roles in shaping its future.
The introduction of new ETF products, increased participation from institutional investors, and technological advancements will further enhance the growth and development of the ETF market in India.
By recognizing the benefits and staying informed about market trends, investors can harness the potential of ETFs to build diversified and cost-effective investment portfolios.
