The ETF story in India

World of InvestingExchange Trade Funds (ETFs) have become very popular among international investors especially since the recession in 2008. In 2007 there were 1,171 ETFs worldwide and the number increased to 4,396 by 2015. The ETF market is now expected to reach $7 trillion by 2021. However, it is believed that this growth is reflective of a bigger trend in world market – an appetite for investment in passive funds. While international investors have invested highly in ETFs, the market in India is not too far behind either. Before we take a look at ETFs in India, let’s take a closer look at ETFs in general.

What are ETFs?

Exchange Traded Funds (ETFs) are index funds that are listed and traded on the stock market exchange. Index funds could not be traded on the stock market before the introduction of ETFs. An ETF is a collection of stocks designed to resemble the composition of an index like CNX, S&P, NIFTY or BSE. Much like stocks and shares, ETFs experience price changes throughout the day as they are bought and sold. These funds have introduced individual and retail investors to an array of investment opportunities globally. ETFs give investors real time exposure to stock markets in different parts of the world at a lower cost.

The first ETFs

The first time anyone tried investing in an ETF was when the Index Participation Shares were launched for S&P 500 in 1989 in the US, also known as Standard & Poor’s Depositary Receipts (SPDRs). The market has only grown since. According to Morgan Stanley, by the end of 2007 there were 1,171 ETFs trading worldwide with assets roughly worth $800 billion. About 60% of trading volumes on the American Stock Exchange is from ETFs.

ETFs in India

India got its first equity ETF in 2001 when Benchmark Mutual Fund was acquired by Goldman Sachs in 2011, launching the Nifty ETS Fund (ETS is short for Exchange Traded Scheme). The ETF industry has grown since. Indian markets saw an inflow of $2.5 billion in 2014 and $4.3 billion in 2015. The segment also saw net outflows of $2.5 billion in 2016

A divestment target of INR 72,500 crore has been set in this year’s Union Budget. The Finance Minister said that ETF will continue to be a preferred vehicle for this process. He was quoted saying, “A new ETF with diversified CPSE stocks and other government holdings will be launched in 2017-18.” An increase in ease of access and the possibility of trading being facilitated through asset management companies (AMCs) will continue to drive their growth in the country. ETFs comprised of diversified CPSE stocks would be popular with new retail investors if such investors could be served by the Asset Management Companies instead of compulsory demat accounts. Mutual funds are a great benchmark in this regard. Mutual funds service investors who don’t use demat accounts but transact via stock exchange platforms used by both trading members as well as limited purpose members.

Over the years, mutual funds have also established a strong investor servicing infrastructure with extensive linkages to stock exchanges, Settlement Corporation and brokers operating on stock exchange platforms, allowing them to service investors who don’t use demat accounts. Such a model would make ETFs popular with small retail investors. Furthermore, the possibility of trading being facilitated through asset management companies (AMCs) will continue to drive their growth in the country.

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