Moving beyond Sensex and Nifty: How ETFs and mutual funds are mimicking newer indices

Although smart-beta funds do not have a long track record, initial data shows that some of them hold promise. ICICI Prudential Nifty Low Vol 30 ETF tracks the Nifty 100 Low Volatility 30 TRI. The index comprises 30 stocks that have low volatility, chosen from the constituents of the Nifty 100 index. Over the last three years, the scheme has delivered 11.86 percent returns compared to the 9.44 percent managed by large-cap funds, according to Value Research. The Standard deviation – a measure of volatility – for the scheme stands at 16.81 compared to 21.51 for the large-cap category.

“Low volatility or value-based ETFs can be considered for staggered investments as they may be less volatile compared to the broader markets as well as the Nifty 50 index,” says Deepak Jasani, Head-Retail Research, HDFC Securities.

Shobhit Mathur, Senior Director, Kotak Investment Advisors adds that smart beta strategies based on low volatility have demonstrated the potential to offer superior returns over the long term.

Another interesting pocket within smart-beta funds is value investing. For some years now, value funds haven’t done well. They lost 9 percent in 2018 and gave a miserable 2 percent return in 2019, underperforming multi-cap funds by a wide margin. But in 2020, they staged a comeback: value funds gave 16.43 percent returns as opposed to large-caps that delivered 15.5 percent returns.

Kotak NV20 ETF or Nippon India ETF NV20 (NNV20) that track the Nifty 50 Value 20 TRI are some options for investors. This index is constructed using the most attractively-valued 20 stocks from the 50 companies of the Nifty 50. This strategy has worked well; over the past three-year period, it gave 16 percent returns, while large-cap schemes managed about 9 percent returns. Over the past five years, the NNV20 strategy delivered 17 percent return, as compared to 13 percent returns given by large cap funds, as per Value Research data. “Investments in these schemes bring in style diversification to your portfolio at a time when most portfolios are tilted towards growth focused strategies,” says Rupesh Bhansali, Head-Mutual Funds, GEPL Capital.

Theme ETFs

Companies that meet the stringent Environment-Social-Governance (ESG) criteria appear to be investor favourites, as six ESG funds were launched in 2020.

ESG is a fairly diversified theme. Despite there being actively managed schemes around this theme, Rishiraj Maheshwari, Founder and CEO, RISCH Wealth & RISCH Family Office recommends investments in Mirae ESG Sector Leaders ETF (MESG). “It offers exposure to large-cap stocks of leading companies in the sector, picked on the basis of ESG parameters at the least cost among ESG focused schemes in India,” he says.

MESG was rolled out in November 2020 and tracks the Nifty100 ESG Sector Leaders TRI. Over five years ended December 2020, the index has given 12.83 percent returns. If you believe ESG investing suits your risk appetite, you may want to accumulate it.

Banking sector ETFs are another option. “Expectation of strong economic growth and a supportive policy framework should help private sector banks to do well in medium to long term,” says Umesh Mehta, Head of Research, Samco Securities.

But thematic funds come with their own risk. “A timely entry in – and exit from – thematic funds is important. That’s why retail investors are better off with diversified ETFs,” says Sayalee Khandke, Manager Research, Investica- an online platform to invest in mutual funds.

Thematic funds should not be your first investments, only risk takers as well as those who understand these sectors well enough, should invest in them.

Government companies’ ETFs

The Central Public Sector Enterprises (CPSE) ETF mimics the Nifty CPSE index.

So far, this scheme has disappointed. It has lost 9 and 12 percent over the past one and three-year time frames, respectively. Over the past five years, the scheme’s returns are a negligible 0.54 percent. Factors such as continuous overhang of divestments from the government and large allocations to out-of-favour sectors such as power and oil & gas have led to severe underperformance against the broader markets.

But as the economic cycle turns, some experts say these stocks could make a comeback. The dividend yield of the index stands at 5.26 percent, which is fairly attractive in a low interest environment.

“Conservative equity investors looking for high dividend yield from a diversified large cap equity portfolio, should consider some allocation to the CPSE ETF,” says Harshvardhan Roongta, Certified Financial Planner, Roongta Securities.

Investors should choose investment options in the context of their financial goals and their risk appetite.