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What is driving retail participation in ETFs?

ETF, equity, equity investment, mutual fund, MF, direct equities, Nifty ETF, Sensex ETF, Midcap ETF, BSE 500 ETF, Mutual Fund, MF, Exchange Traded Fund, ETF, risk, diversification, capital rquirement, taxation, Gold Mutual Fund, Gold ETF, Gold Mutual Fund vs Gold ETF, better investment option, gold, SIP, mutual fund investmentUnlike investing through mutual funds, when it comes to investing in ETFs, a Demat account is necessary.

An interesting trend that has been playing out over the past year is the increased acceptance of passive investing among retail investors. Retail ETF folios as of March 2021 zoomed to 41,38,426, registering a growth of 126% over the last year and on a five-year basis the growth was at 675%. Till a year back, passive investing was mainly considered a bastion of institutional investors and HNIs. Ranging from index funds to exchange-traded funds (ETFs), passive investments gained ground in terms of both investor interest and assets under management (AUM).

The ETF Universe

As of June 2021, India’s mutual fund landscape is home to a total of 108 ETFs, tracking 42 indices, accounting for an asset base of Rs. 3.2 lakh cr. The ETFs available are spread across asset classes – equity, debt and gold. Of the 108 ETFs, 82 of them are equity-based offerings with assets under management worth Rs. 2.6 lakh cr. It was only last month the NSE announced the listing of the 100th ETF on its exchange platform, a full 20 years later since the first ETF, a Nifty 50 based scheme, was launched.

Within these equity ETFs, an investor has a plethora of options in the form of market capitalisation based, sector-based and Smart beta ETFs. When it comes to debt-based ETFs, the offerings are limited in the form of liquid, gilt and PSU debt ETFs. Currently, investors have the choice of 15 debt ETFs with a total asset size of Rs. 40,717 cr. In terms of commodities, there are 11 gold ETFs an investor can consider. They account for assets worth Rs. 16,225 cr.

Reasons for increased retail interest in ETFs

Unlike investing through mutual funds, when it comes to investing in ETFs, a Demat account is necessary. Data from national depositories National Securities Depository Limited and Central Depository Services clearly show that the number of active demat accounts held by retail investors is steadily increasing. As of FY21, there are over 6 crore demat accounts of which over 2 crore accounts were added in just one year. It is very likely that ETFs have been one of the beneficiaries of this rising trend.

Given that millennials compared to earlier generations are much more tech-savvy in nature and are open to experimentation, especially when it comes to investment avenues, ETFs present an interesting investment route over direct investing. With the proliferation of digital-only applications, investing in ETFs today is just a few clicks away.

Another factor that aided ETFs is product innovation and increased levels of awareness. Today, ETFs are no longer limited to plain vanilla schemes; there are several smart beta ETFs that can help generate better risk-adjusted returns. With regards to product awareness among investors, thanks to the various initiatives by fund houses, media, and other stakeholders, there has been a conscious effort in educating investors about these offerings. As a result of these, retail investors are slowly but steadily warming up to the concept of ETFs and have started to take notice of the potential ETFs hold. While all of these developments are encouraging, there is a long way to go when it comes to improving investor awareness around the various passive offerings.

It also helps that ETFs combine the trading flexibility of a stock, coupled with diversification and low costs of a mutual fund. The fact that ETFs offers exposure to a basket of stocks at a fraction of the amount and has several advantages compared to direct investing are factors that have helped elicit a favourable response from millennials.

Last but not the least, equity markets have been going through a booming time. Just like a rising tide lifts all boats; in a bull market, all the avenues of equity investment attract investor attention. ETFs too is a part of the lot. However, if you are an investor who is not sure about equity investing but wishes to take exposure to equities, ETF is a good stepping stone and over the long term is likely to hold you in good stead when compared to direct equity investing.

by Nitin Kabadi, Head ETF Business, ICICI Prudential AMC

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