As per data from industry body Association of Mutual Funds in India (AMFI), over the last one year, index fund folios have more than doubled to almost 2.55 million from 1.09 million. The growth rate has been similar for ETFs as well, as the number of folios increased to 10.8 million from 4.5 million. Distributors believe these could go up in the coming year.
The Securities and Exchange Board of India (Sebi) has mandated that every fund house shall appoint at least two market makers, to provide continuous liquidity on the stock exchange platforms. Direct transactions with the fund house will be facilitated for investors for amounts greater than ₹25 crore, which will increase liquidity. A fund house will also have to disclose the iNAV (indicative net asset value) on a continuous basis – with a 15-seccond lag for equity ETFs and at least four times a day for debt ETFs. These regulations are expected to boost volumes in the passive space. The regulator has also laid guidelines on how debt passive funds should be managed, so that they replicate a diversified underlying index, which would increase investor confidence in debt funds.
“The recent move by the regulator will increase investor confidence and act as a trigger to increase volumes further in the ETF space,” said Niranjan Awasthi, head (product), Mutual Fund.
Financial planners believe the Sebi steps would help reduce investor hesitation to buy passive funds. “There was a lot of investor interest in exchange-traded funds but they were hesitant to buy them due to low liquidity. Regulatory steps will now ensure liquidity in many ETFs and subsequently we shall see higher participation from many investors,” said Jitendra Solanki, a Sebi-registered investment adviser.
As volumes increase, fund houses are expected to come up with a slew of new products in the passive space.
“There is unlimited ideation possible in the passive fund space,” said Swarup Mohanty, CEO of Mirae Asset Management.
Over the last one year, there have been new products in the passive space, like an ESG fund, manufacturing fund, large and midcap fund, as well as momentum and low volatility funds. In the debt space, there have been a series of target maturity funds that have a mix of PSUs, SDLs (state development loans) and government securities.
Many investors prefer index funds due to their low cost and ease of investing – these cost a fraction of what active funds cost.
A Nifty50 index fund could cost the investor 0.06-0.2% of the investment, while it could be 0.15-0.2% for a target maturity fund and 0.75-1.25% for an actively managed equity fund in a direct plan. In a debt fund, the cost could be 0.25-0.75%.
