Passive investing blazes a trail: Nifty ETFs cross Rs 1 trillion in assets

It’s happening slowly but surely in India. Passive investing in India has been gaining ground. The assets under management (AUM) of Exchange Traded Funds (ETFs) that track the Nifty 50 index as the benchmark have crossed a new milestone of Rs 1 Trillion in August 2020. Also, the total AUM of the ETF (Equity & Debt) industry in India has crossed Rs 2 Trillion in October 2020.

ETFs are mutual fund schemes traded on the BSE and the NSE just like equity shares. An ETF simply invests its entire corpus in all the securities and in the same proportion as its benchmark index composition. An ETF is not meant to outperform the benchmark index. You need a demat account to buy an ETF.

Active large-cap funds find it tougher beat benchmarks

It has been getting tougher for actively-managed funds – especially large-cap schemes – to outperform their benchmark indices. Fund houses have been now mandated to benchmark their funds against total return indices. Since these indices also include dividends, they are tougher to beat. Weak markets and very few stocks in benchmark indices outperforming have also resulted in underperformance of actively-managed funds.

EPFO lends a large helping hand

A significant part behind Nifty ETFs’ staggering growth is the government’s decision to invest 15 percent of the Employees Provident Fund Organisation’s (EPFO’s) annual deposits in ETFs. EPFO has been investing in the stock market since August 2015 via ETFs. Apart from investing in Nifty as well as Sensex ETFs, the EPFO also invests in government disinvestment ETFs such as the Central Public Sector Enterprises (CPSE) ETF and Bharat-22 ETF.

ETFs trading volumes rise

This resulted in more fund houses warming up to passive funds. Apart from index schemes, fund houses also started rolling out ETFs. Currently, there are 17 ETFs tracking benchmarks such as the Nifty 50 index. Increased interest, especially from institutional investors, resulted in traded volume going up significantly.

Retail participation is low in ETFs

As per an analysis of the data put out by the Association of Mutual Funds of India, just about 1.7 per cent of the overall equity and debt ETFs’ pie belong to retail investors. Corporate investors, on the other hand, constitute close to 90 percent. The reason: EPFO is treated as a corporate investor since this is a retirement fund managed by the government of India.

Low expense ratios

While most ETFs are modest in size, those that get steady inflows from EPFOs, such as SBI ETF Nifty 50 and UTI Nifty ETF are significantly large in size. In fact, at a corpus size of Rs 74867 crore, SBI ETF Nifty 50 is the country’s largest mutual fund scheme. Stiff competition among ETFs to attract the central government towards choosing the disinvestment vehicle has also resulted in a fall in expense ratios across the board.