Exchange traded funds (ETFs) are mutual funds which can be bought and sold in stock markets. Just as any other fund, they track a particular index, sector, commodity, or asset.
With total assets under management (AUMs) of ₹3.91 lakh crore, ETFs — although dominated by institutional investors — have started gaining a foothold among retail investors too, says the ICICI Direct Research mutual fund review.
ETFs have already become quite pervasive in the financial markets around the world, with assets under management (AUMs) already outpacing those in traditional mutual funds in many countries.
In India, the ETF landscape started to gain traction since 2015 and has become bigger as well as diverse. AUM for ETFs stood at ₹5,400 crore in December 2014 and grew to over ₹3.9 lakh crore currently, states the report mentioned above.
There is no denying the fact that growth in ETF is steered by institutional flows led by EPFO in Nifty 50 and BSE Sensex ETF along with CPSE ETFs. At the same time, inflows from individual investors have also started gaining traction.
There is a growing trajectory of allocation towards ETF. “The ETF market is expected to grow on the back of continued thrust from government and rising acceptance of such products as an investment vehicle by the retail segment,” states the report.
Investment advisors, however, believe that retail investors are yet not aware of ETFs, although it’s convenient to invest in them since they are tradeable in stock markets.
“Common investor is, in fact, not too aware of their existence even now. However, the key advantage of investing in ETFs is the convenience they offer of investing in an index fund via mutual funds which are tradeable. So, it’s the operational aspect of investing which makes them distinct from vanilla funds,” says Renu Maheshwari, investment advisor, Co-founder, Finscholarz Wealth Managers.
Return of various category of ETFs:
| ETFs | 1-year return (%) | 3-year (%) | 5-year (%) |
| Nifty 50 ETF | 14.5 | 18.5 | 15.9 |
| Sensex ETF | 12.5 | 18.6 | 16.6 |
| Nifty 100 ETF | 12.5 | 18.1 | 15.0 |
| Midcap 100 ETF | 26.3 | 22.4 | 13.1 |
| Midcap Select ETF | 13.3 | 18.0 | 11.8 |
| Nifty India Consumption ETF | 14.2 | 15.0 | 13.3 |
| Nifty Infrastructure ETF | 19.7 | 20.8 | 11.1 |
(Source: ICICI Direct Research)
Why are they getting popular?
ETFs are best placed from an asset allocation perspective as they do not carry any stock selection risk. Indian equity ETF market has grown with many categories of ETFs offered in large cap, thematic and midcap segment.
ETFs have a host of attractive features. Usually, they have much lower fees and can be bought and sold during the day unlike mutual funds that usually execute at the close.
Earlier, there was primarily Nifty or Sensex ETF but now there are a number of ETFs in the large cap space such as Nifty Next 50 ETF.
Similarly, in midcaps, Nifty Midcap 100 ETF and Nifty Midcap 150 ETF are available. There are a number of thematic ETFs also such as banking ETFs and Nasdaq 100 ETFs, among others.