Vasanth Kamath
The last few years have been remarkable for passive investing, especially 2019.
With the underperformance of active mutual funds in 2018 already moving the spotlight on the importance of reducing fees, this year has seen landmark developments that will spur the growth of ETFs and passive investing in the 2020s.
In January 2019, the Securities and Exchange Board of India (SEBI) came out with guidelines for all indices used by equity ETFs and index MFs. In a move that makes these products even more safe and transparent, it defined weightages of individual stocks in such an index, among other things. Then, in November 2019, SEBI issued similar guidelines for debt indices.
With Budget 2019, the Finance Ministry also proposed certain ETFs eligible for tax-deduction under Section 80C for the first time ever.
The 6th tranche of the CPSE ETF opened in July 2019, and was oversubscribed more than five times. Similarly, the fourth tranche of the Bharat-22 ETF was oversubscribed 12 times when it opened in October 2019. Bharat Bond ETF, the country’s first ever corporate bond ETF, was launched in December 2019, and was oversubscribed two times.
And in a continuing trend, the EPFO contributed almost Rs 87,000 crore to ETFs in the first nine months of the year, one of the highest ever.
These developments and trends not only show increased demand for such passive investing products from retail investors, but also increased support from AMCs and institutions.
In 2020 and following years, we expect these trends to become even more pronounced for ETFs and Index Funds:
Increased demand and inflows from retail investors:
The simplicity and transparency of these product make them easier to understand, which remains a key draw among investors, especially younger millennials.
Cost-consciousness among investors is also growing. Many are realizing that a large part of their portfolio can be allocated to beta (i.e. the index) at cheap fees going as low as 0.05 percent - and that this can be a very cost-effective and rewarding way to get equity exposure.
Innovative passive products from AMCs:
Leading AMCs are now launching different kinds of index funds/ETFs that go beyond merely tracking the Nifty-50 & large-caps.
These include traditional ones like midcap and smallcap, but also innovative ones such as smart beta, fixed income, etc. New indices are also being created in this regard. For example: the NSE Multi-Factor Index and the Nifty-100 ESG index, which selects companies from an environmental/social/governance point-of-view.
With disinvestments via ETFs being very successful, it’s likely that the government will continue bringing new offerings similar to Bharat Bond and the CPSE ETFs.
Increased focus from advisors on asset allocation vs just fund selling
With increasing choice of passive products and new infrastructure to enable transactions, many advisors are beginning to offer holistic asset allocation advice using passive products to clients, rather than merely distributing mutual funds.
With the largest wealth management firms and advisory platforms already moving in that direction with recent offerings, we expect this to become even more prevalent in 2020.
(The Author is co-Founder and CEO at smallcase Technologies.)
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