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AUM of Nifty 50-based passive funds crosses Rs 2 trillion. Have investors benefitted?

Nifty 50 index is considered as stock of the nation, hence investors who are invested in an Nifty 50 ETF or an index fund can participate in India growth story in a low-cost manner

May 09, 2022 / 10:08 AM IST
Exchange-traded funds (ETF) are getting popular by the day in India. In April 2022, the assets under management (AUM) of Nifty 50 index based ETFs crossed Rs 2 trillion-mark. It traversed the distance between Rs 1 trillion to Rs 2 trillion in just 20 months; the previous landmark was hit in August 2020. According to NSE India: “The Nifty 50 index-linked passive funds account for 40 percent share of total passive funds (ETFs and Index Funds) AUM in India. Currently, there are 17 ETFs, 19 index funds that track the Nifty 50 index. Additionally, there are seven international ETFs that also track the Nifty50 index”. Hemen Bhatia, Head ETF, Nippon Life India Asset Management Ltd says, “Nifty 50 index is considered as stock of the nation, hence investors who are invested in an ETF or an index fund with underlying as Nifty 50 index can participate in India growth story in a low-cost manner without guessing which stock will outperform in the future”.
Exchange-traded funds (ETFs) are getting popular by the day in India. In April 2022, the assets under management (AUM) of Nifty 50 index-based ETFs crossed Rs 2 trillion-mark. It traversed the distance between Rs 1 trillion and Rs 2 trillion in just 20 months - the previous landmark was hit in August 2020. According to NSE India: “The Nifty 50 index-linked passive funds account for 40 percent share of total passive funds (ETFs and Index Funds) AUM in India. Currently, there are 17 ETFs, 19 index funds that track the Nifty 50 index. Additionally, there are seven international ETFs that also track the Nifty50 index”. Hemen Bhatia, Head ETF, Nippon Life India Asset Management says, “Nifty 50 index is considered as stock of the nation, hence, investors who are invested in an ETF or an index fund with underlying as Nifty 50 index can participate in India growth story in a low-cost manner without guessing which stock will outperform in the future”.
The big secret behind the high growth of Nifty-based ETFs is a large share of provident fund money that gets invested in Nifty 50 based ETFs. Nearly 3/4th of the total assets under management of Nifty50 based ETFs come from The Employees Provident Fund Organisation (EPFO), that invests 5-15 percent of its incremental deposits in ETFs. EPFO has been investing in the stock market since August 2015 through ETFs. Apart from investing in Nifty as well as Sensex ETFs, the EPFO also invests in government disinvestment ETFs such as the CPSE ETF and Bharat-22 ETF.
The big secret behind the high growth of Nifty-based ETFs is a large share of provident fund money that gets invested in Nifty 50 based ETFs. Nearly 3/4th of the total assets under management of Nifty50 based ETFs come from The Employees Provident Fund Organisation (EPFO), that invests 5-15 percent of its incremental deposits in ETFs. EPFO has been investing in the stock market since August 2015 through ETFs. Apart from investing in Nifty as well as Sensex ETFs, the EPFO also invests in government disinvestment ETFs such as the CPSE ETF and Bharat-22 ETF.
Smart investors like High Net-worth Individuals (HNIs) and institutions including EPFO dominate the AUM of Nifty 50 index linked passive funds. Although retail investors’ money gets deposited in the employees’ provident fund, EPFO collectively is considered to be an institutional investor.
Smart investors like High Net-worth Individuals (HNIs) and institutions including EPFO dominate the AUM of Nifty 50 index linked passive funds. Although retail investors’ money gets deposited in the employees’ provident fund, EPFO collectively is considered to be an institutional investor.
Last few years saw higher retail participation in the equity market including equity mutual funds due to the attractive returns from the equity investments. Retail investors accounts in equity ETFs and index funds too increased manifold by 468 percent and 362 percent respectively over the last two years.
Last few years saw higher retail participation in the equity market including equity mutual funds due to the attractive returns from the equity investments. Retail investors accounts in equity ETFs and index funds too increased manifold by 468 percent and 362 percent respectively over the last two years.
One of the other reasons why passive funds turned attractive is underperformance of active large-cap funds against their benchmark such as Nifty 50 TRI. Stricter investment norms post implementation of recategorisation exercise in 2018, benchmarking against total return indices and higher expense ratio made large-cap funds tougher to beat. Low cost structure and adhering to market returns turned passive funds attractive among investors.
One of the other reasons why passive funds turned attractive is underperformance of active large-cap funds against their benchmark such as Nifty 50 TRI. Stricter investment norms post implementation of recategorisation exercise in 2018, benchmarking against total return indices and higher expense ratio made large-cap funds tougher to beat. Low cost structure and adhering to market returns turned passive funds attractive among investors.
Over the long run, Nifty 50 index has delivered notable returns. Performance as measured by 10-year rolling return calculated from the last 20 years data shows that Nifty 50 TRI delivered a compounded annual growth rate of 13.4 percent. Salaried investors without demat account who are new to equity market can consider start investing in the Nifty 50 index funds through SIP route.
Over the long run, Nifty 50 index has delivered notable returns. Performance as measured by 10-year rolling return calculated from the last 20 years data shows that Nifty 50 TRI delivered a compounded annual growth rate of 13.4 percent. Salaried investors without demat account who are new to equity market can consider start investing in the Nifty 50 index funds through SIP route.
Among the Nifty 50 ETFs, Nippon India ETF Nifty BeES, SBI-ETF Nifty 50, ICICI Pru Nifty ETF, Kotak Nifty ETF and HDFC Nifty 50 ETF score on all parameters including lower Tracking Error, lower expense ratio and higher traded volume. Among the Nifty 50 index funds, UTI Nifty Index Fund, HDFC Index Fund, ICICI Pru Nifty Index Fund, SBI Nifty Index Fund and IDFC Nifty Fund score on Tracking Error and lower expense ratio.
Among the Nifty 50 ETFs, Nippon India ETF Nifty BeES, SBI-ETF Nifty 50, ICICI Pru Nifty ETF, Kotak Nifty ETF and HDFC Nifty 50 ETF score on all parameters including lower Tracking Error, lower expense ratio and higher traded volume. Among the Nifty 50 index funds, UTI Nifty Index Fund, HDFC Index Fund, ICICI Pru Nifty Index Fund, SBI Nifty Index Fund and IDFC Nifty Fund score on Tracking Error and lower expense ratio.
Limited liquidity has been a cause of concern in the Indian ETFs landscape for years. However, the last two years saw significant surge in the traded volume in equity ETFs in the exchanges. India’s flagship ETF -- Nippon India ETF Nifty BeES -- has touched its record mark of a single day traded volume of Rs 351 crore on NSE recently. Hemen Bhatia of Nippon Life India AMC, says, “Investors have realised the utility that an index ETF offers. They buy a basket of stocks via a low-cost passive fund such as Nifty BeES that gives exposure to almost 54% of the market capitalisation of all stocks listed on NSE. We have seen increased participation across investor categories such as retail, HNIs and family offices since the onset of COVID, leading to massive rise in volumes across our broad market ETFs.”
Limited liquidity has been a cause of concern in the Indian ETFs landscape for years. However, the last two years saw significant surge in the traded volume in equity ETFs in the exchanges. India’s flagship ETF -- Nippon India ETF Nifty BeES -- has touched its record mark of a single day traded volume of Rs 351 crore on NSE recently. Hemen Bhatia of Nippon Life India AMC, says, “Investors have realised the utility that an index ETF offers. They buy a basket of stocks via a low-cost passive fund such as Nifty BeES that gives exposure to almost 54% of the market capitalisation of all stocks listed on NSE. We have seen increased participation across investor categories such as retail, HNIs and family offices since the onset of COVID, leading to massive rise in volumes across our broad market ETFs.”
During the trading hours, the spot price of the ETFs may trade at a premium or discount to their iNAVs (indicative NAVs). This occurs due to illiquidity and less-active market makers. Market makers are authorised participants appointed by the AMCs to keep the spot price close to the fair value. If the price of the ETF trades above its iNAV, the ETF is said to be trading at a ‘premium’ and if the price is below its iNAV, it is said to be trading at a ‘discount.’ This leads to higher impact cost. Nippon India Nifty BeES and SBI ETF Nifty 50 have an impact cost of 0.03 percent and 0.07 percent (as of April 2022, on the NSE) respectively.
During the trading hours, the spot price of the ETFs may trade at a premium or discount to their iNAVs (indicative NAVs). This occurs due to illiquidity and less-active market makers. Market makers are authorised participants appointed by the AMCs to keep the spot price close to the fair value. If the price of the ETF trades above its iNAV, the ETF is said to be trading at a ‘premium’ and if the price is below its iNAV, it is said to be trading at a ‘discount.’ This leads to higher impact cost. Nippon India Nifty BeES and SBI ETF Nifty 50 have an impact cost of 0.03 percent and 0.07 percent (as of April 2022, on the NSE) respectively.
Dhuraivel Gunasekaran
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