MUTUAL FUNDS

In India ETFs are still at a nascent stage and the retail participation is very low<
27-Mar-17   14:06 Hrs IST

Lakshmi Iyer
In an interview with Anjali Raulgaonkar from Capital Market Publishers, Lakshmi Iyer, CIO (Debt) & Head - Products, Kotak Mutual Fundsaid, With institutions such as Employees' Provident Fund Organization (EPFO) committing huge investments into ETF's, hopes are high that the government may prompt state-run agencies and companies to invest in it.

Excerpts:

  1. Are ETFs staging a comeback or seeing a resurgence?
  2. Certainly. In India, ETF's are becoming more popular and more fund houses are filing new ETF products with SEBI. In last 5 years, the growth in ETF AUM was around 32% annually vis-à-vis 25% for MF Industry.

    Currently, Indian ETF market is one of the fastest growing market in the world. We believe that it is still at a nascent stage. In terms of AUM in the MF industry, it is less than 3% of the industry as of Feb-17.

    With institutions, such as Employees' Provident Fund Organization (EPFO) committing huge investments into ETF's, hopes are high that the government may prompt state-run agencies and companies to invest in it.

    Please find below AUM YOY figures:

    MonthETF AUM (cr)Total MF Industry AUM (cr)ETF AUM Share (%)YOY ETF AUM Growth (%)YOY Total MF Industry AUM Growth (%)
    Feb-1745,913 1,789,047 2.57204.89145.12
    Mar-1622,409 1,232,824 1.82152.29113.86
    Mar-1514,715 1,082,757 1.36111.44131.21
    Mar-1413,204 825,240 1.60100.61117.65
    Mar-1313,124 701,443 1.87114.19119.45
    Mar-1211,493 587,217 1.96166.1899.15

    Source: AMFI

  3. How do you see the performance of ETFs vis a vis previous year? How has been the performance of ETFs launched a year ago and beyond period (up to 5 yrs)?
  4. ETF's are passive funds and mirrors the performance of its underlying index. The performance of ETFs in last couple of years are in line with its index.

    Although rarely considered by the average investor,?tracking errors?can have an unexpected material effect on an investor's returns. It is important to investigate this aspect of any?ETF?index fund before investing.?

  5. Why are ETFs gaining investor fancy?

Reasons why the growth in ETF has picked up:

    • Low Cost: In last couple of years, the expenses charged by ETFs have been declining with rising assets. 3 years ago the average expense ratio of the ETFs was around 40-50 bps and currently it has come down to around 10 bps.
    • EPFO: The flows in ETF have been increasing mainly from the EPFO investment. In September last year, the EPFO increased its equity allocation to 10% of incremental flows. As per estimates about Rs 18,000 crore has been invested by the EPFO as of Feb-17. This amount may increase further if there is a decision to increase allocation to 15%.?
    • Disinvestment by Govt.: In 2014 Govt. has started disinvestment through ETF route. The first ETF was launched in Sep-14 was CPSE ETF. Till now it has collected Rs 9000 crore in two separate offerings and another offering of Rs 2500 crore currently going on.
  1. Who should invest in ETFs? What are the tax advantages and disadvantages?
  2. ETF works for all types of investors. For a first time retail equity investors to a traders and to institutional investors, ETFs is an ideal investment vehicles. ETFs trades like a stock and works like mutual funds, it gives benefits of both sides. Also for investors who looks for passive investment or exposure to any particular index ETF fulfils the requirement along with low cost and portfolio diversification.

    ETFs which have Indian equities as underlying have equities taxation(long term Capital gains after 1year is Nil? For non-Indian equity underlying ETfs like gold ETF etc., the taxation is that of debt (long term CapitL Gains post 3years)?

    Investors don't incur STT (Securities Transaction Tax) by buying and selling ETF units on exchange. The STT is nil if ETF units are bought on exchange and on selling the STT is 0.01% in comparison with stocks it is 0.10% on both sides. (Please refer to latest tax laws before investing)?

  3. How does the ETF Market in India compare with that in the US? What are the difference/similarities?

In developed markets like US, the ETF offering is much broader and investors have wide range of choices to invest in. ETF's consists of domestic ETF's, International ETF's, Currency ETF's,Alternative ETF's and in various asset classes ETF's. The appetite for ETF's is more in US by retails as well as by institutionalinvestors. In India ETF's are still at a nascent stage and the retail participation is very low. Also due to higher alpha generation by active funds in India investors are not diversifying in ETF's but the same is not with US markets.

In US the ETF flows are higher from retail segment mainly due to the higher awareness on ETFs but the case is not same for India as the retail penetration on ETF is very low.

Also alpha generation in actively managed US funds continues to be a challenge even now?

India is still an alpha market hence we could see gradual but steady growth in ETFs

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