In a year that witnessed major aftershocks from the outbreak of the COVID-19 pandemic, passively managed products have seen a massive rise in popularity. Ranging from index funds to exchange-traded funds (ETFs), passive investments gained ground in terms of both investor interest and assets under management (AUM).

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For instance, in January 2020, the AUM for index funds and ETFs, including Gold ETFs, was around Rs. 8,082 crore and Rs. 1,84,534 crore, respectively. Fast forward to May 2021, the assets under each of these verticals soared to Rs. 22,904 crore and Rs. 3,16,289 crore witnessing a growth of 183 percent and 71 percent, respectively. Given that India’s passive investment market is at a nascent stage, the increasing asset trend points to an encouraging trend of retail investors warning up to index funds and ETFs.

Growth in the ETF Segment

India’s ETF history goes back to December 2001, when the first ETF, a Nifty 50 based scheme, was launched. Clearly, ETFs are not new to the Indian markets. However, they have only recently begun to gain currency. It was only in August 2020, the passively managed product tracking the Nifty50 index crossed the Rs.1 lakh crore mark.

Despite this, the total AUM of ETFs in India, including index funds, comprises below 10 percent of the total mutual fund AUM in the country. This number appears even slighter when compared to a developed market like the US, where passive funds account for over 50 percent of the total mutual fund industry AUM.

ETF Options in India

Today, ETFs are available across asset classes – equity, debt and gold. Within equity, an investor has the option to choose from Market capitalisation based, sector-based or Smart beta ETFs. When it comes to debt, the offerings are limited to liquid, gilt and PSU debt ETFs. Finally, in terms of commodities, we have gold ETFs.

As of May 2021, India’s mutual fund landscape is home to a total of 108 ETFs. Of this number, the majority of schemes are equity-based. Across fund houses offering equity products, the large-cap ETF is the most widely available scheme, followed by Gold ETF which has a total of 11 schemes and AUM of INR 16,625 crore. The AUM of equity and debt ETFs put together stands at Rs. 2,99,664 crore.

Factors Enabling the Growth of ETFs

To begin with, the ETF segment received a push from the Indian government in 2014 when the authorities announced that the upcoming disinvestments would proceed through the ETF route. The government’s move brought the outlying ETFs under the financial spotlight. In the last six years, the disinvestment program has been utilized by way of two ETFs - the Central Public Sector Enterprises (CPSE) ETF which follows the Nifty CPSE Index comprising 11 PSU stocks and the BHARAT 22 ETF which follows the S&P BSE Bharat 22 Index made up of 22 companies belonging to 11 different sectors.

The other major decision which bought passive investing under the spotlight was the announcement that retirement body Employees Provident Fund Organization (EPFO) would be investing a part of its vast corpus in ETFs. Beginning August 2015, the organization has been investing in ETFs tracking indices like the Nifty 50, S&P BSE Sensex, CPSE, and Bharat 22.

As a result of these, there was a buzz around passive investment. Consequently, there has been a growing awareness regarding passively managed products among investors thanks to the various initiatives by fund houses, media, and other stakeholders who have been educating investors about these offerings.

ETFs in the Future

While ETFs have, so far, been considered an institutional product, there seems to be a shift happening with retail investors adding passively managed products into their portfolios. The growth trajectory of the Indian ETF market is likely to mirror that of the developed markets where investors started with index-based ETFs and evolved to innovative products such as the smart beta ETFs and geography-based offerings.

In the coming years, it is likely that smart beta ETFs could emerge as the go-to product for an astute investor. Also, the knowledge around sustainable investing will help create space for newer and more disruptive passively managed products. However, there is a long road ahead that needs to be traversed when it comes to improving investor awareness around the various passive offerings.

The author, Chintan Haria, is Head- Product Development and Strategy at ICICI Prudential AMC. The views expressed are personal

First Published:Jun 30, 2021 8:40 AM IST