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Axis Nifty ETF: another taker for EPFO money?

LiveMint logoLiveMint 27-06-2017 kayezad e. adajania

It has been a sort of a revolution in the Indian mutual funds industry. Sometime last month, SBI ETF Nifty 50 (SEN50) became India’s largest equity mutual fund scheme. Slowly but surely, SEN50 has toppled HDFC Equity Fund, which long held the top spot. Encouraged by SEN50’s size, fund houses are no longer averse to launching passive funds, even though most still believe that active funds tend to outperform passive funds in the long run in India. Almost all fund houses either already have at least one such fund, or are looking to launch one soon. Axis Asset Management Co. Ltd’s launch of its own exchange-traded fund, called Axis Nifty Exchange Traded Fund (ANET), should be seen in this context.

The new fund offer (NFO) opened on 13 June and closed on 21 June. But since it’s an open-ended fund, you can still buy it from the exchange. But should you?

ANET will invest its corpus in all the scrips—and in the same proportion as they lie—in the Nifty50 index. Being passively managed, it will not aim to outperform its benchmark index. The aim will be to mirror its movements.

Passive funds such as ETFs don’t carry any fund manager risk. They go up or down as much as the markets do—the Nifty50 index, in this case. Also, and as a result, their expense ratios are lower than actively managed funds’. Of course, during rising markets, they outperform actively managed funds. But even over long durations, they give better returns than fixed-income instruments and are similar in risk profile.

Since you can buy and sell ANET only on the stock exchange, you need a demat account to transact its units. While many investors have demat accounts, there are many others who don’t, especially those who invest only through mutual funds. Demat accounts come with annual maintenance charges. Opening a demat account just to buy and sell ANET may not be worth it.

Except a few, most ETFs in India have traditionally suffered from illiquidity. There may be days when not enough buyers are available. If your emergency corpus is in an ETF, a quick withdrawal at the right price may be difficult. Although ETFs’ liquidity has improved over the past 2 years, much improvement is needed.

While it would take some time for small investors to warm up to ETFs, fund houses are not chasing these products either. It is likely that fund houses are launching these schemes to cater to pension funds. In June 2015, the labour ministry allowed the Employees’ Provident Fund Organisation (EPFO) and other provident fund (PF) trusts to invest 5-15% of their incremental inflows into equities, either through equity mutual funds, ETFs benchmarked to S&P BSE Sensex or Nifty50, or by directly buying equity shares of large companies.

The EPFO decided to start by invest 5% in ETFs launched by SBI Funds Management Pvt. Ltd, largely through its Nifty fund and a small allocation to its Sensex fund. Eventually, the EPFO increased this to 10%. The quantum of EPFO’s corpus is so large that SEN50 has today become the largest equity fund in the Indian mutual funds industry, with a corpus of close to Rs20,000 crore, even though the scheme was launched as recently as July 2015. SBI ETF Sensex’s corpus is close to Rs6,000 crore. EPFO also invests in UTI Asset Management Co. Ltd’s ETFs. Besides EPFO, many other exempt PF trusts also invest in ETFs. But it is essentially the EPFO pie that Axis AMC and most of the top funds are targeting. That’s also why ANET’s expense ratio is just 0.07%.

ETFs come with a superior structure than index funds. But for want of better liquidity, avoid investing in them for now. Stick to index funds if you want market returns and want to avoid fund manager’s risk.

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