'ETFs have finally found acceptability in India' | Economic Times

Indian investors are finally, it seems, warming up to the idea of passive investing. They are also investing in ETFs. Shivani Bazaz of ETMutualFunds spoke to Vishal Jain, Head ETF, Nippon Life India Asset Management, to find out how he view the scenario. Edited interview.ETFs are suddenly gaining a lot of investor interest. How do you view the scenario?ETFs have finally found acceptability amongst Indian investors – and this is not only with reference to institutional investors but also HNIs and retail segments. Going forward the adoption of passive products will increase and this is a result of the Indian market turning ‘efficient’ because of which consistent alpha generation has become a high hurdle. Also due to many ETF products being launched across asset classes, i.e., equities – broad market indices, sector ETFs, fixed income, international ETFs and gold, it is now easier to construct differentiated passive baskets using ETFs.Is passive investing finally getting approval of regular investors?The rapid growth and acceptability of passive investing can be attributed mainly to the following factors: a) scheme rationalization announced by the regulator about 3 years ago b) benchmarking against TR indices as against the practice of price indices which was rampant prior to this regulatory change c) Explosion in demat accountsThe two major regulatory initiatives have made benchmarking more appropriate and proper, hence on account of this alone, alpha has diminished – especially in large caps and to a large extent in midcaps. In addition, increased inflows in the markets has made competition intense thereby leading to inconsistent performance.Investors now understand that passive investing eliminates a major risk of investing i.e., the nonsystemic risk – fund manager and stock specific risks, and, that these additional risks may not necessarily result in a higher expected return over indices. Cost is an important factor of investments – and irrespective of whether one out or underperforms the benchmarks – cost is a constant factor. The low cost of passive ETFs, i.e. it could be as low as 0.05%p.a. for a Nifty50 ETF is becoming a critical parameter for investors.Ever since the pandemic began, there has been an explosion of new demat accounts from retail investors & stock brokers – especially fintechs are encouraging new investors to adopt the ETF route. A low FD interest regime has also been a catalyst for increased adoption of low-cost passive investments. The rise of RIAs (Registered Investment Advisors) has led to the rise of passive investing, RIA interest is not in conflict with the investor and this alignment of interest automatically has led to adoption of low-cost passive products by such advisers. ETFs are emerging as a unanimous choice for overseas investments. What is your view?Asset allocation is the prime mover of portfolio returns. Index ETFs are ideally positioned to practice asset allocation as indices mimic asset classes and represent them. The principle of asset allocation has to eventually evolve from local to global and this is where it is important to include global indices in portfolio construction. Indices spread across geographies help in reducing overall portfolio risks – as different global / country indices may have low correlation with each other and with India.ETFs continue to be least understood by Indian mutual fund investors. Many investors find its structure and fee structure complex? What is your view?On the contrary, the ETF fee structure is very transparent – there are 2 primary costs: a) Annual expense ratios b) brokerage costs – which can be very low now with certain broking entities. It is also very important to invest in ETFs which have high daily average volumes as illiquid ETFs can increase the impact costs of trading in them. What are the exciting investment avenues currently in the ETF space?International indices is a growing segment in the passive investing space. Additionally, smart beta and factor indices, try to outperform the traditional cap weighted beta ETFs. Low vol., value, momentum are some of the factors that are witnessing acceptance, especially amongst HNIs & family offices. Also, the fixed income space has seen the launch of various fixed maturity / roll down ETFs where the underlying credit quality is sovereign in the form of CPSE and SDL debt securities. What is your advice to new investors?It is important for new investors to avoid the stock selection methods of investing and instead invest in entire asset classes or sectors via the respective ETFs. This elimination of stock specific risks is sure to improve their long-term experience of capital markets. In addition, to improve risk-adjusted returns, it is important to build portfolios which diversify across asset classes such as Equity, Debt and Gold which can very easily be achieved through ETFs. For those investors who do not have demat, broking accounts, they can achieve the same through Index Funds.