This year, Dalal Street will see the launch of five new exchange-traded funds (ETFs), four of which will not be marked to the benchmark indices. The broader market's outperformance, coupled with an improvement in investor appetite towards equities, has prompted asset management companies (AMCs) go for non-benchmark indices-based passive investment products.
Currently, fund houses are seeking regulatory approvals for the ETFs, based on indices that include the Bank Nifty, the Nifty Junior and the BSE 100.
Experts believe with the market sentiment turning bullish, the broader market could continue to outperform benchmark indices. Since January, the BSE Sensex and the National Stock Exchange Nifty have returned about 23 per cent, while the BSE 100 and the Nifty Junior have recorded returns of 24 and 26 per cent, respectively. During the same period, the Bank Nifty has risen 32 per cent.
Though the size of the domestic ETF market is only about Rs 5,000 crore, many expect this to rise. "Internationally, ETFs is the largest-growing category but in India, it is still to achieve considerable scale. But as the market sentiment and the broader market performance improves, there will be higher demand for ETFs, including those other than the main benchmarks," said Sandesh Kirkire, chief executive, Kotak Mutual Fund.
Analysts said in the past few years, the Securities and Exchange Board of India (Sebi) had been extremely cautious about approving funds based on broad-market indices. Given the low liquidity in these indices, the regulator was concerned about retail investor exposure to mid-cap names in these indices. This led to fund houses slowing launches.
Now, with Sebi expediting the process of product clearances, the mutual fund sector is taking steps to grow the ETF market. But many analysts believe this isn't the only reason for the variety in these products.
"These days, Sebi is asking fund houses to launch only products that are different from what already exists in their portfolios. This is why fund houses are looking at different kind of products," said Dhirendra Kumar, chief executive of mutual fund tracker Value Research.
Officials believe the cost-efficiency of these products is the biggest draw for investors, though liquidity continues to be a concern. "ETFs, while cost-efficient, are not that liquid, as these don't have any market-making facility. To fill this liquidity gap, we plan to provide market-making, wherein the AMC will buy and sell fund units on behalf of investors," said Dinesh Khara, managing director, SBI Mutual Fund.
ETFs are exchange-listed products, bought and sold on the main exchange platforms. Due to their illiquid nature, fund investors are unable to buy and sell these products at will on exchange platforms. Due to this, as well as the fact that these aren't distributor-push products, this category hasn't yet found favour among investors.
As of July this year, the equity ETF category managed assets worth Rs 4,216 crore, 2.5 per cent of the overall equity assets under management (AUM) of Rs 2.2 lakh crore. The sector's total AUM stands at Rs 10.06 lakh crore.