Why equity exchange-traded funds attract few investors in India.
Despite the potential to grow, ETF in India are slowly losing its
relevance as active fund management still outperforms ETF in returns as well as
on risk parameters
Mukesh Chothani, president at Investment Consultant Association in
Nashik, some 170 km away from Mumbai doesn’t market, exchange traded fund
(ETFs) to investors. The reason: Simple it doesn’t pay. Says Chothani, “Unlike
equity mutual fund we do not get anything in an ETF. In Nashik the total
investment market is about Rs 2,000 crore and ETFs investment is about Rs 50
crore. Among the clients whom I advise, about 1 per cent of the AUM is in the
ETF segment.”
Cut to Aashish Somaiyaa, CEO and MD of Motilal Oswal Mutual Fund
himself believes in parking his money in active funds than passive funds.
Somaiyaa says, “I would personally prefer to invest in an active fund driven by
a philosophy I understand, and agree to.” It’s interesting because it comes
from a fund house that started from selling ETF funds to investors and today
has changed their marketing strategy by selling active mutual funds. The reason
being lack of interest in ETF’s in India.
Players like Chothani sells ETF to clients where he is sure that
they would pay him an advisory fee. It’s not just Chothani but the trend is
similar across Nashik and in the country and the number says it all.
The ETF space in the Indian mutual fund industry has a meagre
share of 0.5 per cent of the equity asset under management (AUM) till the
launch of GS CPSE Exchange Traded Scheme. After the GS CPSE ETS had garnered Rs
3395 crore, the share of the ETF/ETS in the equity space has risen to 2.45 per
cent. Compared globally the ETF industry continues to grow, as investors and
traders around the world become more familiar with the unique features of ETFs.
According to E&Y, at the end of October 2013, from 215 providers on 58
exchanges.
Why
is the ETF market small in India?
Awareness about ETFs is currently very limited. Maximum awareness
is about the gold ETFs due to the popularity. Vishal Dhawan, Chief Financial
Planner at Plan Ahead, an investment advisory firm, says, “Since a large number
of ETFs are based on equity indices, and equities as an asset class has seen
very limited participation from investors in the last few years, ETFs have
naturally not got much attention.” He expects that as equity markets start to
get enhanced participation, ETFs would become more popular as well.
Adds Rohit Shah, a SEBI registered Investment Adviser based out of
Mumbai, “Indian savers love fixed deposits and real estate, they don't yet
understand how ETFs can be leveraged in one's portfolio. Another reason is
internationally ETFs are low cost products. In India, with AMC expenses,
brokerage, securities transaction tax (STT), Demat charges, the ETFs aren’t
attractive and the cost structure are very much similar with actively managed
funds.”
Everyone accepts that the ETF market is not deep in India because
there are less institutional investors in India who are using it as an
investment vehicle. Vineet Arora, Head – Product Distribution at ICICI
Securities says, “ETFs are not on the approved list of many institutional
investors, even the IRDA has recently allowed insurance companies to invest in
ETFs.” Meanwhile Vinod Jain, Founder of Jain Investment points that the
institutional market is not deep in India as pension funds hardly invest in the
Indian stock market.
“With the latest effort of the market regulator to bring in more
transparency and shift the business model towards fee or advisory based
structure rather than the commission based model, the ETFs will witness new
demand from the retail investors as financial advisors would be recommending
the product more often, considering ETFs are cheaper in cost and the advisor
will look into the asset allocation for the investors,” says Aashish Somaiyaa,
CEO and MD of Motilal Oswal Mutual Fund.
Adds Chothani, “In India we need to decide if ETFs will be promoted as an
investment product or as a trading product.”
On the performance front, ETFs lag the active funds anywhere
between 200 to 500 basis points. Interestingly, active funds have delivered
higher returns on back of low risk. On an average the active funds enjoyed a
beta (it measures volatility compared to the index) of 0.8 compared to a one of
ETFs. (See: The performance differential --Active V/s Passive)
So
should investors in India consider ETFs?
Experts believe otherwise. Investors should consider ETFs for the
passive part of their portfolio, wherein they are looking for a passively
managed lower cost solution. “International ETFs like the MOSL NASDAQ, GS Hang
Seng Bees are other options that one can consider,” says Dhavan.
“This depends upon one's investment objectives, duration and
current asset allocation. Since over a long period of time, ETFs can save on
costs and therefore we normally recommend exposure of around 10 to 15 per cent
exposure to ETFs subject to various factors,” says Shah.
There has been a raging debate on whether in a growing economy
like India one should choose passive funds. PVK Mohan – Head Equity Principal
PNB AMC believes that active fund manager is the choice to go for investors.
“If I see the BSE mid-cap today, the FIIs own about 15 per cent of the index,
the same thing 3 or 4 years ago was about 9 per cent. This tells you the
interest. So the Alpha (measure of returns) generation potential continues in
the near term. Over the next 4-5 years the alpha returns in India will be high,
hence active fund management will be a better choice of funds.”
With the ETF segment being open to institutional
investors like life insurance and pension funds, the segment has potential to grow
and evolve. Investors, especially retail would be better-off investing in
active funds than ETFs.
(This is the submission draft. The story had appeared in June issue of Money Today. You can read the final version Click here or copy paste the given below link--
http://businesstoday.intoday.in/story/why-equity-exchange-traded-funds-unpopular-in-india/1/206320.html)
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