Only 1% of individual investor assets and 5% of institutional assets are held in ETFs and FOFs
Most Indian mutual fund (MF) investors are familiar with active investment strategies wherein qualified and experienced fund managers actively manage investors’ portfolios aiming to generate index-beating returns. Active investments involve a deep understanding of the markets and active fund managers are generally accompanied by a team of research analysts. However, passive investment strategy aims to replicate the performance of the overall market.
While Indian investors are still new to the concept of passive investments, globally, passive funds are fast gaining popularity. The global exchange traded fund (ETF) industry has garnered over $4 trillion in assets as of April 2017. However, ETFs in India are still in their budding phase. The relatively low interest for Indian investors in passive investment strategies can also be seen as only 1% of individual investor assets and 5% of institutional assets are held in ETFs and FoFs as of June 2017.
Low liquidity and high bid-ask spread is also a major issue facing ETFs. If information gaps and market inefficiency is utilised, active fund managers can provide index-beating returns.
Investors can also consider smart ETFs created to overcome the limitations of existing indices. The index developer applies a series of filters for stock and sector selection and develops an entirely new index. The index could be based only on value investment style or could focus only on dividend yielding stocks. Once the index is made, it is not tampered with thereafter. Smart ETFs use the same filtering process that an active fund manager uses, but due to model-based selection process, it does away with human intervention. However, such ETFs are extremely new in the market and their track record is yet to be established. So, for now, investors can consider passive investments and begin to increase exposure as they gain confidence.
EASY DOES IT
- Only 1% of individual investor assets and 5% of institutional assets are held in ETFs and FOFs
- Smart ETFs are created to overcome limitations of existing indices
The writer is senior fund manager – equities, BNP Paribas Mutual Fund
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