Making ETF A Part Of Your Portfolio

Why do exchange traded funds (ETFs) suffer from low investor participation even when they have generated better returns than index funds in the same period? The following report provides insights into the ETFs and how they function while pointing out their merits and demerits in terms of retail investing

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September 2020 was the third month in a row when there was a net outflow from equity-dedicated mutual funds. During the same period, there were net inflows of more than ₹20,000 crore into exchange traded funds (ETFs) other than gold but including fixed income. The rise in asset under management (AUM) of ETFs has been even better. Healthy inflows along with gains in the equity market have led to increase in the AUM of ETFs. In fact, over the past two years ending September 2020, the AUM of ETFs has increased at an annual rate of 51 per cent.

The pace of growth of AUM in ETFs far exceeds the growth in AUM of equity mutual funds, which grew by a mere 6 per cent annually in the same period. There are a couple of reasons for ETFs to outpace growth in mutual funds. First, the base was small for the ETFs. At the end of June 2015, the total AUM under ETFs was merely ₹7,320 crore compared to the AUM of equity mutual funds of ₹3.7 lakh crore. Besides, institutional investors made a foray into ETFs only as late as in the year 2015. The acceleration in the growth of ETFs’ AUM began from 2015 when the Employees’ Provident Fund Organisation (EPFO) was allowed to take equity exposure. At present, the EPFO is only allowed to make equity investments through passively-managed ETFs.