Of late, exchange traded funds are grabbing investors’ attention as more and more fund houses are launching products based on them. Those who were aware of only gold ETFs until now are seeing a variety of funds being launched based on both equity and debt.

In fact, more than a third of schemes launched this fiscal were based on ETFs.

This included ICICI Prudenteial Alpha Low Vol 30 ETF, Axis Banking ETF, Motilal Oswal 5-Year G-Sec ETF, Nippon India ETF Nifty CPSE Bond Plus, SBI ETF Private Bank, SBI ETF Consumption and Kotak IT ETF.

To cater to the needs of investors and facilitate fund houses to launch more such schemes, exchanges too floated indices based on a variety of themes. The BSE now has seven thematic, 19 sector and 23 market-cap-based indices, while the NSE has over 50 indices. Even Paytm Money recently launched ETF facility on its platform.

Low-cost attraction

This signals how fund houses are offering schemes based on diversified themes to attract investors. Thanks to fresh launches and new inflows, the assets under management of ETF have jumped 46 per cent in the first two quarters of FY21 to ₹2.31-lakh crore against ₹1.59-lakh crore in the same period last year, which included gold ETFs and CPSE ETF. Recently, the AUM of Nifty 50 ETFs, based on the Nifty 50 index alone crossed ₹1-lakh crore. The main attraction for investors on these passively managed funds is the low cost. The expense ratio for these schemes varies between 0.05 per cent and 0.50 per cent against up to 2.5 per cent levied on actively managed equity funds.

Active vs Passive

As most of the active schemes failed to outperform their respective benchmark indices, investors are increasingly turning to ETFs. According to S&P Indices Versus Active (SPIVA) India Scorecard, over the one-year period ending June 2020, 48.39 per cent of Indian Equity Large Cap funds, 59.52 per cent of the ELSS funds and 82.31 per cent of Indian Composite Bond funds underperformed their respective indices. Even on a 10-year period, 67.67 per cent of large-cap funds underperformed, SPIVA added.

Also in schemes where alpha is generated (extra return over index), the expense ratio eats into their returns substantially. Though passive funds reduce cost, investors should also consider actively managed equity funds in their portfolio, as a well-managed fund will give an extra return in the long term. Besides, all ETFs do not guarantee good returns. In fact, some of them have produced negative return.

To Identify suitable funds, investors may seek the help of financial advisors.

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