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July 2, 2010Exchange Traded Funds or ETFs have revolutionized the Investment Industry in recent times due to their simplicity,low costs and ease of use.The US Market has seen a massive growth in the usage of this Financial Instrument with a mind boggling variety of ETFs catering to almost every asset class ranging from equities,bonds,currencies,commodities and even derivatives.The low cost of the ETFs compared to the mutual funds and their passive form has attracted investors in huge droves.These instruments have a very low percentage cost ranging in the 0.5% range compared to 2% or more for mutual funds.Also unlike MFs,these can be traded like a normal stock during market hours compared to Mutual Funds which can only be traded after the close of the markets.There is a massive amount of literature available on the ETFs so I won’t write more on that here.
Indian ETF evolution
The Indian Market despite being classified as an Emerging Market has seen continuous reforms by the stock market regulator SEBI making the Indian market a pathbreaker in some respects.This institution has been very proactive in deepening and reforming the stock markets in India.Though hazards for Indian investors are present,the market regulator has been trying to curb them through new rules .ETFs in India have been around for a while,but have not won become popular in a substantial way.
Benchmark Asset Managment Company (AMC) has been the only AMC which has focused on the ETF sector in India.The expenses of ETFs launched by this company are decently low and are passively managed (unlike some others).What has helped is that Benchmarket AMC does not have a huge Mutual Fund portfolio to market like other AMCs.Mutual Funds are much more profitable for an AMC and it does not make sense for them to actively pursue the less profitable ETFs.India also does not have large independent Buy-Side Funds which would increase demand for ETFs.Benchmarket AMC despite having the largest variety of ETFs has managed to get some measure of success with only two of its ETFs. The first one is “Nifty Bees” based on India’s NIFTY 50 stock index and the second is “LIQUIDBEES” which has been marketed as the world’s first money market based ETF.The other ETFs launched by this company have suffered from low volumes and not garnered much success.It also recently launched India’s first foreign ETF “HNGSNGBEES”based on the Hong Kong’s Hang Seng Stock Index.This ETF too does not seem to be getting much success.
Other Fund Houses Almost Non-Existent in ETF Products
India’s large AMCs like Reliance,Kotak,Prudential,HSBC,HDFC etc have been laggards in the ETF segment.While most of the fund houses have started ETFs based on Gold and Stock Indices,they remain quite unpopular till now.It is not a big surprise considering their relatively high expenses,lack of differentiation and non-passive nature.The whole purpose of an ETF is defeated if its expense structure is too high or its passive nature of investing is violated.ETFs in India is certain to grow in the future due tits excellent value proposition compared to other financial instruments like Mutual Funds.The current state of the ETF sector reveals it to be severely underpenetrated lacking both in depth and variety.Benchmark is the only AMC be focusing on this sector.There is an excellent opportunity for a new player to make a mark in this sector considering its huge growth potential.
10 Comments
Hello Abhishek,
Good observation about ETF market in India.
The current non-popularity stems from two issues (1) AMC fund houses do not see profitability for themselves in this business, yet. Hence, they spend more resources in marketing MFs; and (2) Current Indian investor mind set is to beat the market. They are not satisfied with index performance. It’s all about perception.
In intermediate term, 3 yrs or so, I do not see ETF gaining any momentum primarily becuase MFs are likely to continue to rule the roost riding the growth in economy.
It’s only in long term, 5+ years, ETFs are likely to become popular, when investors realize MFs are no good, or investors realize about truth behind of beating the market. Right now, they have a real challenge in busting this myth about beating the market.
Best Wishes,
Thank you for your comments. I agree with you that the ETF market won’t become too big over the next few years.There is not enough demand or knowledge about the benefits of the ETF products to make them popular .Indian MFs have done much better than the western counterparts due to the Indian market being more inefficient and less transparent.However as market efficiency and information improves than ETFs as an asset class will come in play
Abhishek
Hi Abhishek,
Am 32 yr old male working in B’lore. I am starting my retirement planning (investing) very late and intend to put close to 10% of my take home every month into equity. I consider the roughly 10% of my take home which goes towards PF as debt portfolio. Do you think it’s a good idea to be investing the 10% in a NIFTY ETF ?
Regards
Raja
Hi Raja,
I am not a personal finance expert but here are my 2 cents.I don’t think 32 years is too late btw especially if you are studying till the late 20s or something.I think its a very good idea to invest 10% of your take home into equity.The best passive instrument to do so would be the NiftyBees considering the expenses,tracking ,performance and liquidity amongst the broad equity market ETFs available in India right now.Investing in individual Indian market stocks is not exactly easy given the opaque corporate governance and information availability.Even with the necessary time and analytical abilities it is tough for a retail investor to find decent stocks in India.The only people I trust amonst Indian corporates are the government stocks,rest of the private groups I am always suspicious to a fault.
Regards,
Abhishek
Hi Abhishek,
Thanks for your reply. Well, i did studied till my mid 20’s. But then soon after taking up job i had to settle lot of other things like family debt, siblings, place for self etc. So, now i have kind of woken up to managing my personal finance for retirement goal.
Have subscribed to your blog via google reader and will look forward to reading your posts in future. Keep doing the good work 🙂
Oh yes! I do maintain a blog about organic kitchen gardening if that’s of interest to you do visit my blog 🙂
Regards
Raja
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Please send me details for starting an SIP in Bench mark ETF funds
thanks
DD Bajaj
bajajdd@gmail.com
You can either directly buy the Benchmark ETF like a share through a broker each month or ask your broker to do it . Many brokers these days like HDFC Securities allow you to do a SIP in specific stocks or ETFs.