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Nippon India ETF top chart journey to nearly 1 crore folios


Nippon Life operates India’s oldest exchange-traded fund (ETF) —Nippon India ETF Nifty BeES —and manages 65,000 crore of investor assets in its ETFs. An ETF is a basket of securities that track an underlying index and are traded on exchanges.

Nippon India ETF Nifty BeES was originally launched as Nifty BeES in 2001 by the Benchmark Mutual Fund (MF). The fund house was acquired by Goldman Sachs (in 2011), and later by Nippon Life India (in 2015). Since then, the ETF industry in India has experienced significant growth.

HemenBhatia, head of ETFs at Nippon Life India and previously worked with Benchmark MF, spoke to Mint about the factors driving ETF growth in India and the fund company’s own growth in the ETF space. . Edited excerpts from an interview:

What has led to this ETF growth in India over the past few years?

We see a lot of retail investors getting involved in ETFs. And once investors are involved, they understand the benefits and they want the product to be part of their portfolio. There have been many growth levers. One was the launch of the CPSE ETF in 2014. When we launched the government-mandated ETF, investors took notice. In India, we have seen that when the government uses a tool or product, it helps the product to become popular and known to the masses. Then the reclassification scheme by market regulator Sebi in 2017 also helped.

Prior to that, an actively managed fund could simply hold 50% of large-cap stocks and balance 50% of mid- and small-cap stocks, as a benchmark against the Nifty 50 and show performance. works better. However, there is now a clear definition of what constitutes a large-cap, mid-cap, and small-cap fund, and there is consensus among the different types of funds. In addition, previously active funds were evaluated only on the return index, which is not appropriate because it does not take into account the impact of dividend payments by the constituent components of the index. The alpha generation challenge also existed before for active funds, but it has become more apparent now. EPFOs and pension funds are also among the biggest contributors to the size of the ETF industry’s assets under management.

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How would you summarize your ETF journey since the MF Benchmark?

From the time of Benchmark MF in 2001, we were the only fund company that talked about ETFs. We are selling a product with an expense ratio of 40-50 basis points, where conventional mutual fund programs are being sold with an initial issuance cost of 6%, an input of 2% and a rate of 6%. total cost ratio is 2.5% -3%. But we firmly believe that if something is sold in the US, it will also gain traction in our market.

What do you think of the growth of factor-based passive funds?

Globally, in a market worth $7-7.5 trillion, factors make up about $1.1 trillion. In India, it is growing, but let me tell you that the factor-based index is as good as any other actively managed plan. So even an active fund manager will use an investment style, whether it’s value, momentum, or growth. So factors are nothing but quantum models with a fixed methodology, except that in the active fund you have human intervention.

The maximum amount made today is from two factors — low volatility and momentum. Factors such as momentum, quality, and low volatility tend to affect the market at different times. So, for someone on time, this factor is as difficult as it is for a fund manager to pick a better stock.

That’s also why we think investors should use a combination of factors. We launched Alpha Low Vol mainly for this reason. We have seen Alpha Low Vol returns to be quite stable. And only the momentum coefficient has come back closer to the Alpha Low Vol. However, on a risk-adjusted basis, Alpha Low Vol scores on momentum.

What do you think of the recent Sebi circular on ETFs?

This is not just a circular, but a reform that Sebi (Securities and Exchange Commission of India) has brought to ETFs. Sebi has done more than a business development for the sake of industry growth. Globally, investors are not allowed to go directly to the fund house, but can only buy and sell ETFs on the exchange. Market makers provide volume on exchanges, in addition to organic volume. While Sebi has always been clear about the designation of market makers when filing the offering, they are still not recognized as an organization in India. This has now changed after the Sebi circular.

The regulator also states that any investor who wishes to trade directly with the fund house can only do so if the transaction value is 25 crore or more. So a lot of this volume where the transaction value is lower 25 crore will now go to exchanges. Before that, any investor the size of even a single lot of Nifty (approximately 1 crore value) can be traded directly with the fund house. While Sebi has given the industry until October 31 for 25 crore-rule rules, this is an important step and should be taken.

Your bank ETF is your largest industry ETF. Can you build on this?

Bank ETFs are quite popular among investors. We also see a lot of insurance companies investing in ETFs. There are a number of regulations that prevent insurance companies from investing in specific sectors beyond certain limits. But through ETFs, these limits do not apply.

We’ve seen a sharp divergence in ETFs versus their underlying indexes in 2020. Why is that?

That can always happen when there is strong volatility in the market. However, the amount of volatility you may see in our ETFs relative to other funds will be low because in addition to market makers, we also have volume from natural investors. So market makers will give you volume between certain spreads. But, what about the volume in those disparities. This is where it matters how much investor money and investor involvement in your ETF.

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