Exchange-traded funds (ETFs) are getting popular by the day in India. In April 2022, the assets under management (AUM) of Nifty 50 index-based ETFs crossed Rs 2 trillion-mark. It traversed the distance between Rs 1 trillion and Rs 2 trillion in just 20 months - the previous landmark was hit in August 2020. According to BSE India: “The Nifty 50 index-linked passive funds account for 40 percent share of total passive funds (ETFs and Index Funds) AUM in India. Currently, there are 17 ETFs, 19 index funds that track the Nifty 50 index. Additionally, there are seven international ETFs that also track the Nifty50 index”. Helen Bhatia, Head ETF, Nippon Life India Asset Management says, “Nifty 50 index is considered as stock of the nation, hence, investors who are invested in an ETF or an index fund with underlying as Nifty 50 index can participate in India growth story in a low-cost manner without guessing which stock will outperform in the future”.
The big secret behind the high growth of Nifty-based ETFs is a large share of provident fund money that gets invested in Nifty 50 based ETFs. Nearly 3/4th of the total assets under management of Nifty50 based ETFs come from The Employees Provident Fund Organization, that invests 5-15 percent of its incremental deposits in ETFs. Employees Provident Fund Organization has been investing in the stock market since August 2015 through ETFs. Apart from investing in Nifty ETFs, the Employees Provident Fund Organization also invests in government disinvestment ETFs such as the CBSE ETF and Bharat-22 ETF.
Smart investors like High Net-worth Individuals and institutions, including Employees Provident Fund Organization, dominate the AUM of Nifty 50 index-linked passive funds. Although retail investors’ money gets deposited in the employees’ provident fund, Employees Provident Fund Organization collectively is considered to be an institutional investor.
The Last few years saw higher retail participation in the equity market, including equity mutual funds, due to the attractive returns from the equity investments. Retail investors accounts in equity ETFs and index funds too increased manifold by 468 percent and 362 percent respectively over the last two years.
One of the other reasons why passive funds turned attractive is underperformance of active large-cap funds against their benchmark, such as Nifty 50 TRI. Stricter investment norms post implementation of recategorization exercise in 2018, benchmarking against total return indices and higher expense ratio made large-cap funds tougher to beat. Low-cost structure and adhering to market returns turned passive funds attractive among investors.
Over the long run, the Nifty 50 index has delivered notable returns. Performance as measured by 10-year rolling return calculated from the last 20 years data shows that Nifty 50 TRI delivered a compounded annual growth rate of 13.4 percent. Salaried investors without Dem at account who are new to equity market can consider start investing in the Nifty 50 index funds through SIP route.
Among the Nifty 50 ETFs, Nippon India ETF Nifty Bee, SBI-ETF Nifty 50, ICICI PRU Nifty ETF, Kodak Nifty ETF and HDFC Nifty 50 ETF score on all parameters including lower Tracking Error, lower expense ratio and higher traded volume. Among the Nifty 50 index funds, UTI Nifty Index Fund, HDFC Index Fund, ICICI PRU Nifty Index Fund, SBI Nifty Index Fund and ID FC Nifty Fund score on Tracking Error and lower expense ratio.
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