Cover Story
popular because such passive funds are priced significantly cheaper . This category of products that ape indices are known as passive funds , because no active intervention of a fund manager is required in these funds .
It is like buying a bunch of stocks that constitute the BSE Sensex , Nifty or any other specified index . Steve Rive , chief commercial officer of S & P Dow Jones Indices LLP , who was in India for the launch of Bharat-22 ETF , says : “ Passive investments are a lot simpler . Where markets are efficient , it is hard to better the indices . A major factor that leads to greater acceptance of ETFs is when there is a move to fee-based advise . This has happened in the US . Unless this happens , advisor has no interest in passive investments like ETFs .”
Sectoral Returns over 1 year |
Consumer Durable |
58.6 % |
Realty |
57.9 % |
Energy |
44.7 % |
Telecom |
43.5 % |
Metal |
40.5 % |
Basic Materials |
37.9 % |
Oil & Gas |
37.0 % |
Finance |
30.7 % |
Bankex |
28.2 % |
Capital Goods |
27.8 % |
Consumer Discretionary |
26.4 % |
Utilities |
26.2 % |
Industrials |
22.3 % |
FMCG |
20.0 % |
Power |
15.2 % |
Auto |
13.8 % |
TECK |
12.8 % |
Information Technology |
8.6 % |
Healthcare |
-7.90% |
Source : BSE
I clearly see ETFs challenging large-cap mutual funds . Natural maturity will lead to markets moving to ETFs for large-caps .
Sundeep Sikka CEO , Reliance Nippon Life Asset Management Company
The A to Z of passive investment
ETFs compare well with large-cap diversified mutual funds that track specific indices or benchmarks . However , what makes ETFs relevant from a retail investor ’ s perspective is the low total expense ratio ( TER ) or the charge that the asset management company levies from investors . The cost of investing in passive funds is as low as 20 basis points ( 100 basis points makes one per cent ), while diversified equity mutual funds can charge between 2.5 per cent to 3.5 per cent . So , an ETF that tracks the Nifty 50 or the Sensex will deliver similar returns but the charges that the investors pay are significantly lower .
Explaining the importance of ETFs in India , Anuradha Rao , managing director and CEO of SBI Mutual Fund says : “ Both the regulators and the government understand that returns are under pressure and they would like to ensure that distribution cost should not affect returns . ETFs allow investors an opportunity to generate decent returns at lower costs . As a product , ETFs are appropriate for new equity investors .”
But don ’ t expect your distributor to sell you an ETF because they don ’ t get commission on it . Since there is no incentive for the distributor to push such products to the investor , awareness for such products is low , laments Rao . “ But natural maturity will lead the market to move towards ETFs for those looking to invest in large-caps . ETFs cannot be ignored ,” Rao believes .
The reason that ETFs charge very low fund management fee is because the discretion or active intervention of fund managers in these schemes is negligible . Money is allocated on the basis of the index . Fund allocation in an exchange traded fund or an index fund is based on the Nifty or the Sensex , and follows the weightage of stocks in the index . Since ETFs are designed to track indices , the fund management fee is 20-30 basis points .
But ETFs need not be plain vanilla offerings that
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Outlook Money December 2017 www . outlookmoney . com