ETF Vs Stock Liquidity

Exchange traded funds (ETFs) have undeniably revolutionised the investment landscape for both investors and financial services professionals alike. They offer opportunities to diversify portfolios, manage risk more effectively, and reduce investment costs. However, to fully harness these benefits, it's crucial to dispel confusion and misconceptions surrounding ETFs Liquidity. The article examines the working of ETFs, their liquidity and how investors can capitalise on them

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The past fiscal year witnessed remarkable performance in the Indian equity market, with all the equity indices showing gains. However, what truly stole the spotlight were the broader market indices and public sector undertakings (PSUs). This bullish trend in the equity market was mirrored in the inflows into equity mutual funds. Last year, dedicated equity mutual funds experienced a net inflow of ₹1.84 lakh crore, marking a significant 25 per cent increase from the previous fiscal year’s inflow of around ₹1.49 lakh crore.

Another notable trend in the mutual fund landscape is the rising popularity of exchange-traded funds (ETFs). ETFs, which track benchmark indices, offer returns closely aligned with market performance. The assets under management (AUM) of index ETFs surged from ₹50,211 crore in FY17 to ₹695,205 crore as of March 2024, reflecting an impressive annualised growth rate of over 50 per cent. This growth in AUM can be attributed partly to the rising equity indices, contributing to mark-to-market gains.

During the same period, key indices like Nifty and Sensex demonstrated compounded annualised growth rates (CAGR) of 18 per cent and 20 per cent, respectively, while BSE 500 saw a CAGR of 20 per cent. The difference in the growth rate between the ETF’s AUM and indices clearly underscores the continued strength of inflows into ETFs. Over the past eight years leading up to FY24, ETFs attracted a cumulative inflow of ₹3.74 lakh crore, accounting for nearly 50 per cent of the current ETFs AUM. Notably, a significant driver of this increase is the participation of the Employees’ Provident Fund Organisation (EPFO) in equity investments through passively-managed ETFs.