An exciting trend that has been playing out more than the previous year is the elevated acceptance of passive investing amongst retail investors. Retail ETF folios as of March 2021 zoomed to 41,38,426, registering a development of 126% more than the last year and on a 5-year basis the development was at 675%. Till a year back, passive investing was mostly thought of a bastion of institutional investors and HNIs. Ranging from index funds to exchange-traded funds (ETFs), passive investments gained ground in terms of each investor interest and assets below management (AUM).
The ETF Universe
As of June 2021, India’s mutual fund landscape is home to a total of 108 ETFs, tracking 42 indices, accounting for an asset base of Rs. 3.2 lakh cr. The ETFs accessible are spread across asset classes – equity, debt and gold. Of the 108 ETFs, 82 of them are equity-based offerings with assets below management worth Rs. 2.6 lakh cr. It was only last month the NSE announced the listing of the 100th ETF on its exchange platform, a complete 20 years later due to the fact the initial ETF, a Nifty 50 based scheme, was launched.
Within these equity ETFs, an investor has a plethora of choices in the type of marketplace capitalisation based, sector-based and Smart beta ETFs. When it comes to debt-based ETFs, the offerings are restricted in the type of liquid, gilt and PSU debt ETFs. Currently, investors have the selection of 15 debt ETFs with a total asset size of Rs. 40,717 cr. In terms of commodities, there are 11 gold ETFs an investor can think about. They account for assets worth Rs. 16,225 cr.
Reasons for elevated retail interest in ETFs
Unlike investing by way of mutual funds, when it comes to investing in ETFs, a Demat account is needed. Data from national depositories National Securities Depository Limited and Central Depository Services clearly show that the quantity of active demat accounts held by retail investors is steadily growing. As of FY21, there are more than 6 crore demat accounts of which more than 2 crore accounts had been added in just one year. It is quite probably that ETFs have been one of the beneficiaries of this increasing trend.
Given that millennials compared to earlier generations are a great deal more tech-savvy in nature and are open to experimentation, particularly when it comes to investment avenues, ETFs present an exciting investment route more than direct investing. With the proliferation of digital-only applications, investing in ETFs today is just a handful of clicks away.
Another element that aided ETFs is solution innovation and elevated levels of awareness. Today, ETFs are no longer restricted to plain vanilla schemes there are numerous sensible beta ETFs that can enable produce much better threat-adjusted returns. With regards to solution awareness amongst investors, thanks to the different initiatives by fund homes, media, and other stakeholders, there has been a conscious work in educating investors about these offerings. As a outcome of these, retail investors are gradually but steadily warming up to the idea of ETFs and have began to take notice of the possible ETFs hold. While all of these developments are encouraging, there is a lengthy way to go when it comes to enhancing investor awareness about the different passive offerings.
It also assists that ETFs combine the trading flexibility of a stock, coupled with diversification and low fees of a mutual fund. The reality that ETFs presents exposure to a basket of stocks at a fraction of the quantity and has numerous benefits compared to direct investing are variables that have helped elicit a favourable response from millennials.
Last but not the least, equity markets have been going by way of a booming time. Just like a increasing tide lifts all boats in a bull marketplace, all the avenues of equity investment attract investor interest. ETFs also is a element of the lot. However, if you are an investor who is not sure about equity investing but wishes to take exposure to equities, ETF is a fantastic stepping stone and more than the lengthy term is probably to hold you in fantastic stead when compared to direct equity investing.
by Nitin Kabadi, Head ETF Business, ICICI Prudential AMC