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No two investors are alike. The choice of investment vehicles depends on their risk appetite. A product that draws consensus as ideal for all types of investors is exchange traded funds (ETFs). All types of investors including retail or institutional, long or short term, look at ETFs to diversify their portfolio and insulate from short-term trading activity. They provide liquidity for those with a shorter-term horizon as they can trade intra-day and can have quotes near NAV during the course of trading day. They are convenient to buy and sell. They facilitate asset allocation and hedging at a low cost. They enable arbitrage between the cash and the futures markets at a low impact cost. ETFs are specially suited to those investors who find it difficult to pick stocks for their portfolio.
The assets under management (AUM) of equity and debt ETFs have seen a 10-fold jump in the past three years and stood at Rs 895 billion end October 2018. AUMs of Global ETF have crossed the US$5-trillion mark. Indices provided by NSE's Nifty account for 76% of the ETF AUM. NSE CEO Vikram Limaye expects the Indian ETF asset size to grow multi-fold over the next few years and cross Rs 1 lakh crore end December 2018.
NSE is bullish on the outlook for ETFs in India and is closely working with all stakeholders to further develop the market in India.
The ETF route will now be increasingly used by various stakeholders, including by the government, to continue monetising their holdings, according to Atanu Chakraborty, secretary, Department of Investment and Public Asset Management. The government garnered more than Rs 17000 crore from the CPSE ETF follow-on offer, the biggest-ever fundraising from a domestic ETF. It is looking at launching another tranche of the Bharat 22 ETF comprising shares of 22 CPSE.
The government sold 2.21% stake in state-owned Coal India (CIL) to the CPSE ETF managed by Reliance Nippon Life Asset Management. CIL accounts for over 80% of the domestic coal production. Post-acquisition, the holding of promoter is 72.92% of the equity share capital of the company.
Availability of relevant market representative indices will play a pivotal role in boosting the popularity of ETFs. Currently, Nifty indices are the most preferred benchmarks for ETFs in India. Contributing to their growth is the Union government's initiative to use the vehicle for disinvestment. Employees' Provident Fund Organization, too, is routing its investment in equity through ETFs.
ETFs provide exposure to an index or a basket of securities that trade on the exchange like a single stock. They closely track the performance of the underlying asset throughout the day Redemption takes place at a fixed NAV price, usually end of day. Unlike listed closed-ended funds, which trade at substantial premia or more frequently at discounts to NAV, ETFs trade close to their actual NAVs. Like any other index fund, subscription or redemption of units works on the concept of exchange with the underlying securities instead of cash for large deals.
As ETFs are listed, the cost of distribution is much lower and the reach is wider. The savings in cost are passed on to the investors. Further, the structure helps reduce collection, disbursement and other processing charges. ETFs protect long-term investors from short-term inflows and outflows as they do not incur extra transaction cost for buying and selling the index shares due to frequent subscriptions and redemptions.
The first ETF in India, Nifty BeEs or the Nifty Benchmark Exchange Traded Scheme, based on Nifty 50, was launched in January 2002 by Benchmark Mutual Fund. It can be bought and sold like any other stock on NSE.
Various mutual funds provide ETF products that attempt to replicate the indices on the NSE so as to provide returns that closely correspond to the total returns of the securities represented in the index. Equity, debt, gold and international indices ETFs are available on the NSE.
Equity ETFs are passive investment instruments that are based on indices
and invest in securities in same proportion as the underlying index. Because of its index mirroring property, there is a complete transparency on the holdings
of an ETF.
Gold ETFs combine the flexibility of stock investment and the simplicity of gold investments. They are based on gold prices and invest in gold bullion. They have much lower expenses compared with physical gold investments.
Global ETFs allow domestic investors to take an exposure to international indices. These ETFs trade in the cash market of the NSE.
Debt ETFs give investors an exposure to the fixed income securities. These debt ETFs combine the benefits of debt investments with the flexibility of stock investment and the simplicity of mutual funds. Debt ETFs trade in the cash market of the NSE. Securities issued by CPSE are some of most frequently-traded securities in the corporate bond market.
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