Increasing trading volumes: so, are ETFs gaining popularity?

Increasing trading volumes: so, are ETFs gaining popularity?

The launch of passively-managed funds, such as index and exchange-traded funds (ETF), is a rarity in the Rs6.65 trillion Indian mutual funds (MF) industry.

However, Kotak Mahindra Asset Management Co. Ltd launched its first ETF on the National Stock Exchange, its second diversified ETF otherwise. Called, Kotak Nifty ETF, the scheme will be benchmarked against the Nifty index. Each unit of this ETF will be approximately one-tenth the daily value of the CNX Nifty index.

What are ETFs?

Unlike index funds, ETFs are listed on the stock markets and you need a demat account to buy ETF units. ETFs are available only on the stock exchanges. Benchmark Asset Management Co. Pvt. Ltd, India’s only fund house that specializes in managing these funds, had launched India’s first ETF in 2002.

Slow start

Few fund houses have shown interest in launching diversified equity ETFs. Gold ETFs, launched when gold prices were rocketing, are comparatively more popular.

As per the Association of Mutual Funds of India (Amfi) data, gold ETFs constitute Rs1,352 crore, or 0.20% of the industry’s total assets under management, while other ETFs (benchmarked to equity market indices) constitute a poor Rs1,031 crore, or 0.16%.

Lakshmi Iyer, head (debt funds), Kotak Mahindra AMC, says: “The ETF market is pretty nascent—only about 1-2% of India’s population has demat and trading accounts, which are required if you want to invest in ETFs. But as investing in funds through stock exchanges pick up, ETFs will gain popularity."

Gaining momentum?

However, things are looking up. As equity markets have shown extreme bouts of volatility, especially in 2008 and 2009, investors are slowly beginning to realize the importance of having at least one ETF in the portfolio.

For instance, the average number of units of Benchmark Nifty BeES (India’s first ETF) and Benchmark Junior BeES in 2009 were 1.45 lakh and 41,886 units, up from 72,000 and 8,083 units, respectively in 2008. In 2008 and 2009, both these ETFs saw an increase of over 100% in trading volumes.

Ashwin Ramarathinam contributed to this story.