The recently-released SEBI's circular was long overdue and it has a lot of things which the ETF industry needed such as market making, increased liquidity on exchange and more disclosure in place, says Siddharth Srivastava, Head, ETF Products, Mirae Asset Investment Managers in an interview to MintGenie.
He talks about the significance of passive funds, and argues that they are performing well in some categories.
He also shares his thoughts on the ETF which — he says — is meant for the first-time investors. Mr Srivastava also talks about the fund categories wherein passive investing schemes are outperforming their active counterparts.
For young investors, he has an advice: patience is the key when the markets are volatile.
Edited Excerpts:
The SEBI's latest circular on May 23 stating that fund houses can launch passive ELSS funds is seen as a positive move by the industry. However, most fund houses already run active ELSS schemes. So, there is a little choice to launch passive scheme because the same fund house is not permitted to launch both active & passive. What are your thoughts on this?
The new circular which the SEBI has issued was long overdue. It is a very positive development that has happened. It has a lot of things which the ETF industry needed in terms of market making, promoting liquidity on exchange, putting more disclosure in place, for example tracking error, etc. plus the ELSS part where now AMCs can now launch passive ELSS schemes. All of these things are very positive development.
It will help the ETF industry and big funds as a whole.
Passive funds are doing well especially in large cap segments where fund managers are finding increasingly difficult to outperform the benchmark. We see retail participation increasing in products like Nifty50 ETF, Nifty50 index fund, etc. because they see these schemes as low-cost schemes. which will provide returns in line with underlying benchmark.
When the same benefits are offered in the ELSS side, we will see good demand by retail investors.
Most of the fund houses have active ELSS schemes. So, the passive ELSS schemes could be launched by the newer AMCs. They, I think, they will lap up this opportunity.
What do you think of the other moves by the capital markets regulator? For instance, investors can now approach the AMC directly for redemption of units of ETFs, for transactions up to ₹25 crore without any exit load?
SEBI has provided pointers and guidance on promoting market making on exchange. There are market makers who provide liquidity in ETFs on exchange. SEBI has defined them for the first time, and in fact, SEBI has now allowed the AMCs to incentivise market makers within the TER.
Ensure liquidity
AMCs can now pay fees to the market makers within the TER of the scheme also. And plus, SEBI has also asked AMFI to ensure that the capital requirement which these market makers have to ensure liquidity is reduced.
What this will do is that it will promote more players to become market makers and it will make the job of market makers easy on the exchange in terms of providing liquidity for any amount in a concerned ETF.
Till now what was happening was that any large investor could come and buy or sell one basket of ETF for, say, ₹50 lakh or ₹80 lakh. Now what they have done is: you can only do that in excess of ₹25 crore. For any amount below ₹25 crore, other than market makers, all other investors including institutional investors have to go and buy & sell on the exchange itself.
So, first they are promoting market markers, they are making things easy for them so that there are liquidity creators on exchange. And then they are sending more and more institutional investors to the exchange itself.
Help retail investors
This will help retail investors in two things. First, the liquidity in ETF will improve. Because more market makers will come hopefully. Second, more transactions will happen on the exchange.
Real time NAV on exchange
Also, SEBI has asked the stock exchanges to display this real time net asset value of ETFs on their website. So, any retail investor, while buying and selling of ETFs, will be able to see what is the theoretical correct price of the ETF.
And if the price is right, then only s/he will be willing to buy or sell.
They are trying to create the entire ecosystem so that it becomes very easy and convenient for retail investors to buy and sell ETF on exchange.
Why should investors choose ETF instead of investing directly in the stock market?
ETF is meant for the first-time investors, who have just started investing. Conversely, investing directly on stock market is riskier. The holding is higher and at times, you may have concentrated holding. Whereas in case of ETF, what you do is to invest in a basket of securities tracking a particular index at a lower cost.
One can buy one unit of Nifty50 for say, ₹160, — the price at which you can not get exposure to all 50 stocks individually.
What are the advantages of buying an ETF over an index fund?
Both index funds and ETFs are good but you can buy and sell the latter at intraday value. There is a convenience of buying units on exchange at intraday price.
There is a perception that passive investing is risky and less lucrative. Do you think this keeps some ambitious investors away from this form of investing?
The objective of active investing is to outperform the benchmark. There are segments such as large cap stocks which have become more efficient and hence, active schemes are not doing well.
In the small cap category, active schemes are doing pretty good. Also, it’s not the question of active or passive investing, it is more about constructing a portfolio as robust as possible.
There should be exposure to both active and passive funds. There is enough data that shows that passive schemes are doing better in some categories.
Is this better to invest in mid and small cap through SIP instead of investing lumpsum?
We believe that the time is more important than the timing. Consequently, SIP route is fantastic for any kind of investment — be it mid cap or large cap.
Is there any advice which you want to give to the young investors particularly when the markets are quite volatile?
Young investors should understand their appetite. Besides, volatility gives buying opportunities. As far as the risk is concerned, investors should be aware that market may continue to behave like this for some more time, so they should be patient. But it is a good time to build a position in the market.