By: Tavaga Research
Benchmark Mutual Fund, in 2001, (later acquired by Goldman Sachs in 2011) launched India’s first Exchange Traded Fund which tracked the Nifty 50 index. Since then, until 2015, the growth of ETFs in India has been very slow, however, ETFs have gained a lot of traction in the last 5 years as the assets under management have surged from Rs 7,032 crore in August 2015 to Rs 2.07 lakh crore in August 2020.
The assets under management of ETFs in India witnessed an annualized growth rate of more than 90 percent in the last 5 years as the number of ETFs also increased from 36 to 99 with a total AUM of Rs. 247000 crore.
In times of recent economic crisis and stock market volatility, investors have been investing in Nifty ETFs which has become clearer from the fact that the asset base of all ETFs tracking the Nifty 50 index crossed Rs 1 lakh crore a couple of weeks back (Source: National Stock Exchange).
Nifty is a blended word, derived from the combination of two words – National and Fifty, as 50 stocks actively trade on the Nifty 50 index. The Nifty index came into existence on 21st April 1996 and was introduced by the National Stock Exchange (NSE).
The term ‘Nifty’ is an acronym for National Stock Exchange Fifty. National Stock Exchange, which started its operations to end the monopoly of the Bombay Stock Exchange (BSE), is the leading stock exchange in India. NSE Indices Ltd. [formerly known as India Index Services & Products Limited (IISL)] owns and manages the Nifty index.
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Nifty 50, one of the benchmark-based indices is considered to be the barometer of Indian capital markets. Nifty 50 index is made up of the most liquid blue-chip companies. The index is made up of the top 50 companies and is computed using the free-float market capitalization method.
As the largest seven companies together constitute more than 40 percent of the Nifty 50 by weightage, the movement in their stock prices will considerably affect the index’s value as well.
As the largest two sectors together constitute more than 50 percent of the Nifty 50 by weightage, the movement in the stocks of these sectors has affected the performance of Nifty 50 in the longer term.
The Nifty 50 index has gone through several changes in the last 25 years as Indian equity markets were the direct beneficiaries of structural reforms carried out by various governments and regulatory bodies.
Financial Services, which ensures robust financial network and contributes to the growth of a nation’s economy by providing credit facilities, accounted for only 20% of the Nifty 50 index at the inception, however, the contribution of the financial space today, is more than 38%. Information Technology (IT) sector which had no presence in the Nifty 50 index in 1996, today makes up for 17% of the index with Infosys and Tata Consultancy Services (TCS) being the top contributors.
Sector | Inception (1995-96) | March 2009 | March 2014 | March 2021 |
Financial Services | 19.7 | 11.78 | 27.45 | 38.08 |
IT | 0 | 9.05 | 16.34 | 16.77 |
Energy | 12.6 | 40.74 | 14.31 | 11.78 |
Consumer Goods | 18.8 | 6.42 | 12.63 | 11.49 |
Automobile | 12.4 | 3.31 | 8.82 | 5.40 |
Pharmaceuticals | 2.5 | 2.49 | 5.23 | 3.26 |
Construction | 4.3 | 3.88 | 4.97 | 2.7 |
Metals | 11.6 | 5.44 | 4.8 | 2.86 |
Cement | 2.2 | 1.9 | 3.08 | 2.72 |
Telecom | 0 | 9.78 | 1.68 | 1.97 |
Power | 0 | 0 | 0 | 1.68 |
Fertilizers | 1.8 | 0 | 0 | 0.56 |
Services | 2.7 | 0 | 0 | 0.81 |
Textile | 5.5 | 0 | 0 | 0 |
Chemical | 5.4 | 0 | 0 | 0 |
Industrial Manufacturing | 0.5 | 5.2 | 0.69 | 0 |
Total | 100 | 100 | 100 | 100 |
Source: NSE, Tavaga Research
Exchange-Traded Funds are passive instruments that are similar to index mutual funds, except the fact that ETFs can be purchased and sold on a stock exchange. The functioning of an ETF is similar in many ways to a stock as the former can be purchased on margin and even sold short.
The asset management companies (AMCs) provide ETF products that passively mirror the composition of NSE indices with the objective of delivering returns that closely correspond to the securities in the index. This is referred to as Nifty ETF.
Securities are pulled together by ETFs that are then divided into smaller units and finally sold to investors. The stocks (or any other asset class) in the portfolio of a particular ETF are identical to those in an index, in the same weightage.
Many AMCs have started offering ETFs in India as the product is gaining a lot of traction at a time when equity and debt-oriented active mutual funds are witnessing continuous outflows every month.
Following is the list of ETFs that mirror the constituents of NSE indices:
Name of Nifty ETF | Issuing AMC | Symbol | Underlying Index |
SBI ETF Nifty | SBI AMC | SETFNIFTY | Nifty 50 |
Motilal Oswal M50 ETF | Motilal Oswal AMC | M50 | Nifty 50 |
Kotak Nifty ETF | Kotak AMC | KOTAKNIFTY | Nifty 50 |
ICICI Prudential Nifty 50 ETF | ICICI Prudential AMC | ICICINIFTY | Nifty 50 |
Nippon India ETF Nifty BeEs | Nippon India AMC | NIFTYBEES | Nifty 50 |
ICICI Prudential Nifty 100 ETF | ICICI Prudential AMC | ICICINF100 | Nifty 100 |
Motilal Oswal Midcap 100 ETF | Motilal Oswal AMC | M100 | Nifty Midcap 100 |
SBI ETF Banking | SBI AMC | SETFNIFBK | Nifty Bank |
Nippon India ETF Long Term Gilt | Nippon India AMC | NETFLTGILT | Nifty 8-13 year G-Sec Index |
Nippon India ETF Junior BeEs | Nippon India AMC | JUNIORBEES | Nifty Next 50 |
SBI ETF Nifty Junior | SBI AMC | SETFNN50 | Nifty Next 50 |
Nippon India ETF Nifty IT | Nippon India AMC | NETFIT | Nifty IT |
Source: NSE, Tavaga Research
Investors looking to invest in funds frequently encounter the dilemma posed by the plethora of instruments available in the market.
One such decision is whether to invest in actively managed mutual funds (MFs) or exchange-traded funds (ETFs). Ultimately, the choice depends on the investment horizon, return requirement, and risk appetite of the investor.
To better understand which investment is suitable, it is essential to understand the effect of costs associated with such investments.
Active portfolio management strategies call for higher fees, which manifest in the form of total expense ratio (TER). TERs are charged annually on the assets under management (AUM) in favor of the fund’s operating expenses. The average expense ratio of an active mutual fund ranges from 0.5%-2%.
Funds operating expense is a sum of investment manager fees, custodial services, taxes, accounting and auditing fees, advertising fees. A maximum TER of 2.5 percent is allowed by SEBI.
Passive portfolio management does not demand active involvement of the fund manager, eliminating investment manager fees, which forms a significant portion of TERs. The average expense ratio of ETFs is 0.1%.
Savings on TERs in the short term is barely significant. However, savings compound over periods to maximize return for an investor with a long investment horizon.
Studies have analyzed that passive management strategies, historically, have provided higher returns as compared to active management strategies.
Therefore, ETFs are likely to realize higher returns through savings in cost as well as higher performance.
Scheme Name | Return 3 Year (%) (Annualised) | Daily AUM (Cr.) |
SBI ETF Nifty 50 | 12.2 | 92536 |
Invesco India Nifty ETF | 12.15 | 1.98 |
ICICI Prudential Nifty ETF | 12.2 | 1360 |
Aditya Birla Sun Life Nifty ETF | 13.2 | 120.19 |
Nippon India ETF Nifty BeES | 12.2 | 2489.2 |
SBI ETF Nifty Next 50 | 4.79 | 567 |
SBI ETF Nifty Bank | 6.58 | 2478 |
Nippon India ETF Bank BeES | 6.55 | 5634.11 |
Motilal Oswal Midcap 100 ETF | 8.34 | 42.28 |
Source: AMFI, Tavaga Research
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