Decoding ETFs - What Lies Ahead And Why ETFs?

As the name explains, ETFs are a type of funds that are simply traded directly on the exchanges, unlike a mutual fund. ETFs carry characteristics of both stocks and Mutual Funds as they are traded in the market in the form of shares and can be bought and sold on a real-time basis during the equity trading time of exchanges. It is also termed as the basket of securities or pool of securities where an investor with less to no knowledge can invest.  

Traded based on the net asset value of the stocks that it represents; the price of the ETF is dependent on the costs of the underlying resources or assets present, and the share price of the ETF will rise on a spike in the underlying assets and vice-versa. An ETF can be further diversified into Equity ETFs, Debt ETFs, Gold ETFs, and currency ETFs.  

In a recent development, Nifty reached a milestone of 100 ETF listings, as per a release from NSE. It took 19 years to reach this milestone after the first ETF being launched in the year 2002. However, in the last one year, as the overall sentiment of the market improved, the ETF space also saw a spike in the listing numbers, a total of 21 ETFs got listed on NSE in the last one-year period taking the Asset Under Management of ETFs at Rs 3.16 lakh crore, as of May 2021. The funds have witnessed an increase of 13.8 times in the last five years as compared to Rs 23,000 crore in 2016. The number of investors transacting in ETFs has also gone up by 96 per cent from 20.4 lakhs in FY20 to 40.1 lakhs in FY21. 

Speaking to BW Businessworld, Mahavir Kaswa, Vice President, Research (Passive Funds) at Motilal Oswal AMC, said, “I think it is one of the key milestones in the growth of passive investing and this shows how passive investing is picking up in India. The first ETF was listed towards the end of 2001, while it took almost 8-9 years to list the next 10 ETFs.  

Why ETFs?  

Exchange Traded Funds offer you a pool of securities under one and hence allows you to explore several opportunities rather than restricting you under some stocks and their performance, which also entails higher risk. ETFs are also comparatively cheaper as the expense ratio is the lowest in comparison with other options such as mutual funds because there is no inclusion of entry/exit load, management fees, etc.   

“ETFs are very low-cost mode of investing in equity market with no risk of significant underperformance to benchmark (Economic). With an investment as little as INR 500, one can get exposure to all Nifty 50 stocks (Efficient). In nutshell, ETFs are an Easy, Economic, and Efficient way of investing in the equity market,” Kaswa explains.  

Apart from this, ETFs are also tax-friendly because the relative amount of fee charged on it is comparatively lesser than that on Mutual funds. With the funds being managed passively, the risk element in ETFs is also narrowed.  

In a recent release from the National Stock Exchange, Vikram Limaye, MD & CEO, NSE, explained how the ETFs are beneficial for retail investors and about India being a retail investor-driven market. “India is a retail investor-driven market. Channelizing household savings into financial products which aids capital formation has always been one of our key objectives.” He said. 

“Apart from retail investors, participation of provident/pension funds in equity markets through ETFs and Government of India using ETFs for their disinvestment programs have given a big boost to the ETF industry in India,” Limaye added. 

What should an investor watch out for while engaging in ETFs? 

As they are traded like stocks in the market, the price fluctuations take place in it, and the action is dependent on the trend or the sentiment of the overall stock market. Less traded or unpopular ETFs carry a high asking price which could increase your buying cost and also lead to brokerage and demat charges. 

What Lies Ahead? 

India has come a long way in terms of the growth of passive investing. However, when compared to global peers especially western and developed counterparts, there are plenty of opportunities to grow in terms of product offerings, and investors’ adoption of ETF as an important asset class in their portfolio. One of the keys for the growth of ETF adoption is investor education and liquidity of ETF shares in secondary markets.   

Kaswa believes that we need to reach out to more investors educating them pros and cons of passive investing, especially in tier 2 and tier 3 cities. In terms of product offering, we need to see more products in the space of factor/smart beta, overseas, ESG, commodities other than Gold, and Debt across different maturities/risks. 

“We will take some time to get there but we are in the right direction,” he said.