Market pulse

Authored by Shrey Jain, Founder and CEO of SAS Online

Exchange Traded Funds (ETFs) have emerged as one of the most invested investment products in the past three years. This is reflected in the very growth of the Asset under Management (AUM) of these schemes. The AUM of these schemes (excluding gold ETFs) grew to Rs 6.44 trillion as on February 29, 2024 from Rs 2.73 trillion three years ago, according to the data released by Association of Mutual Funds in India. Even though contributions by Employees’ Provident Fund Organisation (EPFO) account for the majority of assets in ETFs, individual investors have been increasing their allocations in ETFs.

At a time when valuations of the broad market indices are not cheap and generating alpha has become a challenge, investments in ETFs could be a sensible alternative. Here is why it makes sense to have an exposure to ETFs in one’s portfolio:

ETFs in India are usually passively-managed schemes. ETFs track an underlying index which comprises shares, bonds or commodities. The investment objective of ETFs is to generate returns in line with that delivered by the index, before fees and the tracking error. For instance, an investor who invests in an ETF tracking the Nifty 50 index is expected to enjoy the same returns that is generated by the Nifty 50 index.

An advantage of investing in ETFs is the wider universe of investment choices. ETFs track indices based on market capitalisation–large-cap, mid-cap and small-cap. There are ETFs which are focused on sectors or themes. These include sectors such as auto, FMCG or themes such as manufacturing or infrastructure are a few examples. There are ETFs tracking benchmarks comprising stocks of companies scoring high on quality or value factor.

ETFs eliminate risks associated with a fund manager’s calls going wrong. A fund manager’s role in ETFs is restricted to mimicking an underlying index. Also, ETFs charge very low expenses compared to actively-managed schemes. ETFs tracking the Nifty50 index charge as low as three basis points.

Article is published in Economic Times - Click here