Interview
Ashishkumar Chauhan
MD & CEO, BSE
ETF is an Idea Whose Time has Come
When markets are driven by institutions, then investors don’t like to take
fund manager risk. Compared to active funds, ETFs are more transparent
Passive investment
funds like ETFs are big
internationally, where
fund manager plays no
role in managing a fund.
What is the reason?
In most countries, for
the longest time fund
managers were considered
to be heroes, who were
capable of generating
returns higher than the
Index on a consistent basis.
But over time, passive
funds - index funds started
coming into markets,
where the fund had
stocks exactly in the same
proportion as that on the
Index. You could buy and
sell the fund on exchanges,
so cost was very little for
managing and distributing
the index funds.
In that sense, what
is happening in India
now has happened in
global markets earlier.
The distribution cost for
active mutual funds and
insurance products was
high even in the US back in
time. It is the index that is
giving you the returns. My
job as a fund manager is to
act as a clerk.
In active funds, some
fund managers would buy
illiquid stocks and show
very large returns on paper
but when they went to sell,
very little was coming out.
That was not the case in
index funds. Funds had to
invest in only liquid stocks.
In an index
fund, the fund
manager’s job is
to act as a clerk
Is the risk lower for
ETFs compared to actively
managed mutual funds?
In some sense the win of
the passive funds is the
victory of an idea, which
became larger than the
hot shot fund managers.
Transparency and lower
costs have made ETFs what
they are. They are engines
of finance globally.
How should retail
investors view ETFs?
If India is going to do well
as a nation and if an Index
represents India, then at
the lowest possible cost we
will do well. If you believe
in government enterprises,
then you can invest in
S&P BSE Bharat-22 ETF
or if you believe in IT
sector then you can invest
in a S&P BSE IT sectoral
ETF. If you are investing
in S&P BSE Sensex, very
few people have beaten it
over a period of 10 years
other than the greats like
Warren Buffet.
Do you see ETFs
becoming popular
in India?
Recently, when EPFO
started investing in the
market through such
funds, asset management
companies started
managing a larger corpus.
The government also
created a PSU index. And
now, S&P BSE Bharat-22
ETF has been launched.
The index fund evolution
in India is at the halfway
mark, but the inflexion
point has come.
If mutual fund houses
are not going to push
ETFs, then do they have a
future in India?
Over time people will
look at returns and costs.
For instance, S&P BSE
Bharat-22 index ETF will
have less than 1bp cost
in a year. When markets
become institutions
oriented, they don’t want to
take a fund manager risk.
The index funds give them
low cost fund management
and enhanced transparency.
No amount of de-marketing
can stop ETFs from
becoming popular.
www.outlookmoney.com December 2017 Outlook Money
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