Last year, Vanguard Group Inc. overtook Fidelity Investments as the world’s largest mutual fund (MF) by assets. Some saw it as a victory for indexing or passive fund investing. Fidelity, on the other hand, emphasized on active fund management with its star manager Peter Lynch beating the S&P 500 for 23 years on the trot.
Vanguard was at the forefront of an exchange-traded fund (ETF) revolution in the West. Flows into this category crossed $100 billion (Rs 4.5 trillion) for the fourth consecutive year. In the $12-trillion US MF market, ETF assets crossed $1 trillion in 2010.
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Ripples of this wave splashed into our shores as well. Some $4.1 billion, or 14.6%, of foreign institutional investor inflows into Indian stocks last year can be traced back to ETFs, according to the Credit Suisse Group AG.
But the ETF revolution in India stops at that. This category remains a niche product for Indian asset managers and local investors.
Some indicators are promising though. Seven ETFs were introduced in the past 12 months, the highest ever in India. The number of schemes has increased by one-third to 25 since 2008. ETF assets under management, too, more than doubled to Rs 4,727 crore by December over a year ago, albeit helped by increases in the price of gold and indices, the two most popular underlying assets.
Trading in some of the most liquid ETFs has increased at a faster pace than the key Nifty index of the National Stock Exchange. A favourable base effect also helped.
But passive investing doesn’t seem to appeal to Indian investors. Two-thirds of the assets under ETFs are proxies for physical gold. The rest, along with the Rs 1,210 crore in index funds, makes up less than 2% of equity assets managed by local fund houses.
This is somewhat puzzling, since roughly half the actively managed equity diversified funds underperformed their benchmark indices over three years, according to data for 202 funds provided by Value Research. It is not much different in the past year when four of every 10 equity funds covered in that database underperformed the BSE-100 index of the Bombay Stock Exchange.
Fund managers say ETF distribution happens through stockbrokers, who are not always happy to push these products. Unlike other MFs, investors need a demat account to buy an ETF, an added burden and cost that many prefer to avoid.
But the real reason may be different. In a country where retail investors enter the markets with stars in their eyes and hopes of windfall gains, which some astute managers did deliver in the past bull run, active management will always rule, say fund managers.
Graphics by Yogesh Kumar/Mint
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