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BT Insight: 2020 AUM growth in ETFs not worth the hype; should you invest?

BT Insight: 2020 AUM growth in ETFs not worth the hype; should you invest?

The assets under ETFs as on September 30, 2020 stood at Rs 2.18 lakh crore, up Rs 66,000 crore or 43.22 per cent more than the same period in 2019

The AUM growth was significantly higher at 60 per cent between September 2018 and September 2019, while it was 57 per cent between September 2017 and September 2018 The AUM growth was significantly higher at 60 per cent between September 2018 and September 2019, while it was 57 per cent between September 2017 and September 2018

It's raining exchange traded funds (ETFs). Data from Morningstar India shows more than 10 ETFs have been launched this financial year compared to only five in the same period last year. However, one should not read too much into it. The assets under ETFs as on September 30, 2020 stood at Rs 2.18 lakh crore, up Rs 66,000 crore or 43.22 per cent more than the same period in 2019.

The AUM growth was significantly higher at 60 per cent between September 2018 and September 2019, while it was 57 per cent between September 2017 and September 2018. So, although the overall ETF AUM has been growing year-on-year, the growth in 2020 is not worth the hype. But, no denying the fact that ETFs, a low-cost passive investment route make for one of the most effective investment options for a know-nothing investor.

Here's all you need to know about ETFs and where you may invest:   

Why ETFs?

ETFs in concept are like passive mutual funds, but they trade on stock exchanges. So, by investing in ETFs, you get MF-like diversification across stocks and freedom to buy and sell your units like individual stocks. For example, Nifty50 ETF track the Nifty50 index, hence it invests in 50 stocks of Nifty in proportion of their weight in the index. Since there is no active involvement of a fund manager to pick stocks, the expense ratio of ETFs is lower.  

"ETFs have a much lower expense ratio compared to mutual funds and the charges vary between 0.05 per cent and 1 per cent of the net asset value," says Prashant Joshi, Co-founder and Partner, Fintrust Advisors. Note that you do require a demat account to buy and sell ETFs.

Types of ETFs

There are ETFs in largecap, midcap and multicap categories, and also sectoral ETFs along with global ETFs. You have gold ETFs and some of ETFs in debt category. The most popular ETF is Nifty50 which crossed Rs 1 lakh crore AUM in September.

Minimum investment limit

There is no minimum investment limit for equity ETFs. One can purchase as low as a single unit, at per unit cost. "For Bond ETFs, the minimum investment is of Rs 1,000 and in multiples of Rs 1,000 thereafter. The minimum investment limit in gold ETF is 1 unit, which is equivalent to 1g of gold," says Nitin Kabadi, Head ETF Business, ICICI Prudential AMC.

Recent ETF launches

In August 2020, ICICI Prudential AMC launched Multi factor smart beta ETF that tracks Nifty Alpha Low Volatility 30 Index. "Through this offering an investor can take exposure to multiple factors (alpha+ low volatility) through a single index product," says Kabadi of ICICI Pru AMC.  The same month it launched thematic ETF - ICICI Prudential IT ETF - to allow investors to invest in a basket of top IT companies. It is one of the few AMCs that have an ETF in the midcap category - ICICI Prudential Nifty Midcap 150 Index. The AMC's two most popular ETFs in terms of AUM include ICICI Prudential Nifty ETF (Rs 1307.36 crore) and ICICI Prudential Gold ETF (Rs 827.89 crore).

The debt ETF category in India is still evolving. Retail investors are not quite active in debt ETFs. Bharat Bond ETFs - the first one being launched in December 2019 - played a big role in attracting retail participation in debt ETFs.

The four Bharat Bond ETFs that invest in AAA-rated public sector companies are the most popular debt ETFs now. Just today Nippon Life India Asset Management launched a debt ETF -- Nippon India ETF Nifty CPSE Bond Plus SDL that will invest in AAA-rated bonds issued by government-owned entities and state development loans .

"The government-backed Bharat Bond ETF along with few ETFs such as Nippon ETF Long Term Gilt and Liquid BeES, SBI-ETF 10Y Gilt, LIC G-Sec LTE Fund are few suitable ETFs in debt category which are from fund houses with a strong pedigree," says Joshi of Fintrust Advisors.

Building a portfolio with ETFs

As an investor preferring passive investment management, you may build your entire portfolio with the help of ETFs in Equity, Debt, Commodity and Currency categories.

"Within Equity, one can opt for domestic ETF and Global ETF. On the domestic front one can look at plain vanilla Sensex or Nifty ETFs as the core of the portfolio and little allocation on strategic ETFs such as Nifty50 Value 20 (NV20) and Nifty Next 50 etc. One can look at specific ETFs like banking, consumption and infra for gaining exposure to specific industry/sector. It is advisable to not allocate more than 10 per cent towards Global Equity ETF tracking NASDAQ or Hangseng and Gold. For debt allocation, one can consider Bharat Bond along with liquid ETFs or Gilt ETFs based on the time horizon," says Joshi of Fintrust Advisors.

Taxation on ETFs

Equity ETFs - index and sectoral ETFs - are taxed differently than Gold, International and Debt ETFs. Short term capital gain (STCG) made on equity ETF units held for less than one year is taxed at 15 per cent, while long term capital gain (LTCG) on units held for more than one year is taxed at 10 per cent, without indexation benefit. In case of gold, international and debt ETFs, any gain arising on the sale of units held for more than 36 months is considered as LTCG, which is taxed at 20 per cent after indexation benefit. Any gain arising on the sale of ETF held for less than 36 months is considered STCG, which is taxed as per the applicable income tax slab rate.

The issue in ETFs

Although ETFs trade on the stock exchanges, the liquidity in some ETFs could be an issue. So, you may not find buyers if you wish to sell your units or vice versa. "Investors need to be cognisant of the bid-ask spread on ETFs before investing, to make sure they are not buying at a significant premium or selling at a significant discount as compared to market price. Typically the broad based equity ETFs should have relatively better liquidity, but traditionally liquidity hasn't been great for ETFs. Investors can check the liquidity and daily trading volumes to get a sense of the liquidity from the perspective of their trade amount," suggests MorningStar.

If lack of liquidity in your preferred ETF scares you, you may go for the index fund route of the same ETF. The expense ratio on the MF could be slightly higher than its ETF counterpart, but buying and selling from the liquidity point of view will be simpler. "The passive segment - be it ETFs or index funds -- has been slowly gaining traction among investors but is still at a very nascent stage. As financial literacy around such products improves, we believe these segments will gain strength in the years ahead," says Kabadi of ICICI Prudential AMC.   

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