Why Mutual Fund Houses Are Launching ETFs Now?
Mar 16, 2015

Author: PersonalFN Content & Research Team

World cup mania is intensifying in India as Indian team has entered quarterfinals with a clean sweep in league matches. Likewise, as market rally has sustained over last 16-18 months, there is a great zeal among mutual fund houses to garner fresh money. They are not leaving any stone unturned to increase their asset base. After having launched dozens open ended and close ended actively managed equity funds, now fund houses have turned to Exchange Traded Funds (ETFs).

Are ETFs popular in India?
Although Exchange Traded Funds (ETFs) have been very popular in developed markets, they are yet to gain acceptance in India. ETFs and Fund of Funds (FOF) together don't form even 5% of total Asset under Management (AUM) of mutual funds in India.

Exchange Traded Funds- Not-so-popular in India

(Source: AMFI, PersonalFN Research)

ETFs are actively traded index funds that replicate a targeted index. Their aim is not to outperform the underlying index, but to match the returns generated by the index in a cost effective way. The main reason for their being popular in developed markets is lower possibility of underperformance. In India, the concept has not become popular primarily because actively managed funds have performed well by and large. Almost half the assets managed under ETFs are focus on movement of Gold prices in India. Moreover, the ETFs have not been as cost effective as they are expected to be in India.

Mutual funds are launching ETFs aggressively…
Many fund houses have filed draft applications seeking permission from Securities and Exchange Board of India (SEBI) for launching ETFs. Given below is the list of such fund houses.

In the offing...

Fund house	Name of the fund	Date of filing
Edleweiss Mutual Fund	Edleweiss Exchange Traded Scheme - MSCI India Domestic (MSCI India DES*)	11-Mar-15
Edleweiss Mutual Fund	Edelweiss E-track - Nifty	11-Mar-15
Edleweiss Mutual Fund	Edlweiss Exchange Traded Scheme - Banking (Banking EES)	11-Mar-15
SBI Mutual Fund	SBI-ETF 10 year Gilt	9-Mar-15
Reliance Mutual Fund	Reliance MSCI India Domestic ETF	5-Mar-15
ICICI Prudential Mutual Fund	ICICI Prudential Bank ETF	2-Mar-15
Reliance Mutual Fund	R*Shares CNX Midcap ETF	10-Feb-15
Reliance Mutual Fund	R*Shares NV20 ETF	16-Jan-15

List is not exhaustive
(Source: SEBI, PersonalFN Research)

Why ETFs now?
Currently market valuations are high and stock picking has become difficult. In a way launching an ETF is relatively safe at this juncture as the fund manager doesn't have to bother about underperformance; yet asset size of the fund house grows. However, that is not the only reason for mutual funds to launch more ETFs. It is believed that, Foreign Institutional Investors (FIIs) have been assessing passively managed funds for taking exposure in India. Moreover, to bet on a sector as a whole, they prefer the ETF route. You may see a number of sector oriented ETFs lined up for this very reason. Apart from this, launching ETFs may help some fund houses broaden their product basket.

Should you invest in ETFs now?
PersonalFN believes you shouldn't invest in them blindly. An investor, who is new to equity as an asset class, may consider investing in equity oriented ETFs that capture the movement of a broader market index. You shouldn't forget that, investing in a sector oriented ETF may not help you reduce risk and thus you may avoid them. PersonalFN is of the view that, Gold ETFs remain one of the best options to investing in gold. Before you invest in any ETF, make sure the AUM size of the fund is big enough. Your investment portfolio must always be in accordance to your financial plan. Having said this, PersonalFN believes, it may be more rewarding to invest in actively managed funds provided selection of the fund is right. In case you don't have time to analyse mutual fund schemes on your own, you may take professional help. PersonalFN provides unbiased mutual fund research services.