Nippon Life runs India’s oldest exchange-traded fund (ETF) —Nippon India ETF Nifty BeES —and manages ₹65,000 crore worth of investor assets in its ETFs . An ETF is a basket of securities which track an underlying index and get traded on the exchanges.
The Nippon India ETF Nifty BeES was originally launched as Nifty BeES in 2001 by 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 seen significant growth.
Hemen Bhatia, who is head-ETF at Nippon Life India and had earlier worked with Benchmark MF, spoke to Mint on the factors that have driven ETF growth in India and the fund house’s own growth in the ETF space. Edited excerpts from an interview:
What has led to this ETF growth in India over the last few years?
We see a lot of retail investors participating in ETFs. And once there is investor participation, they understand the benefits and they want the product to be part of their portfolio. There have been multiple levers of growth. One is the launch of CPSE ETF in 2014. When we launched a government-mandated ETF, investors took notice. In India, we have seen that when government uses an instrument or product, it helps the product’s popularity and takes it to the masses. Thereafter, the scheme re-categorisation by market regulator Sebi in 2017 has also helped.
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Earlier, an actively-managed fund could just take 50% large cap stocks, and balance 50% between mid- and small-cap stocks, benchmark itself against Nifty 50 and show outperformance. However, now there is a clear definition of what constitutes a large cap fund, mid cap fund and small cap fund and there is uniformity in comparison of different fund categories. Also, active funds were earlier only benchmarked against price return index, which was not appropriate as it didn’t take into account the impact of dividend payouts by the index constituents. The challenge of alpha-generation was there earlier as well for active funds, but now it has become more apparent. EPFO and pension fund money has also been one of the biggest factors contributing to the burgeoning size of assets under management of the ETF industry.
How would you summarize your ETF journey since Benchmark MF?
From the time of Benchmark MF in 2001, we were the only fund house talking about ETFs. We were selling a product with 40-50 basis points expense ratio, when regular mutual fund schemes were being sold with an initial issue expense of 6%, entry load of 2% and total expense ratio of 2.5%-3%. But we had the conviction that if something is picking up in the US, it should also gain traction in our markets.
What do you make of the growth of factor-based passive funds?
Globally, in a $7-7.5 trillion market, factors make up for some $1.1 trillion. In India, it is picking up, but let me tell you that factor-based index is as good as any other actively-managed scheme. So, even an active fund manager would use an investment style, whether it is value, momentum or growth. So, factors are nothing but quant models with a fixed methodology, except that in active funds you have human intervention.
The maximum money collected today is from two factors—low volatility and momentum. Factors like momentum, quality, low volatility tend to impact markets at different points of time. So, for someone to time the factor is as difficult as for a fund manager to pick an outperforming stock.
That’s also the reason why we think investors should use a combination of factors. We launched Alpha Low Vol mainly because of this. We have seen returns of Alpha Low Vol are quite consistent. And only momentum factor has returns closer to that of Alpha Low Vol. However, on a risk-adjusted basis, Alpha Low Vol scores over 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 Board of India) has brought about for the ETFs. It is more of a business development that Sebi has undertaken for the growth of the industry. Globally, investors are not allowed to come directly to the fund house, but can only buy and sell the ETF on the exchange. Market makers provide the volumes on the exchange, apart from the natural volume. Though Sebi was always clear on appointing market makers when an offer document is filed, they were still not recognised as an entity in India . This has now changed after the Sebi circular.
The regulator also stated that any investor who wants to trade directly with the fund house, can only do so if the transaction value is ₹25 crore and above. So, a lot of these volumes where transaction value is below ₹25 crore will now shift towards the exchanges. Earlier, any investor with even one lot size of Nifty (close to ₹1 crore value) could directly trade with the fund house. While Sebi has given industry time till 31 October for the ₹25 crore-rule, it is an important step and should get implemented.
Your banking ETF is your largest sector ETF. Can you elaborate on this?
Banking ETF is quite popular among investors. We also see a lot of insurance companies investing in the ETF. There are some regulations that prevent insurance companies from investing in particular sectors beyond certain limits. But through ETFs, these limits don’t apply.
We had seen sharp divergence in ETFs vis-a-vis their underlying indices in 2020. Why is that?
That can always happen when there is sharp volatility in the markets. However, the amount of fluctuation you would have seen in our ETFs versus others would have been low because apart from market makers, we also have volumes from natural investors. So, market makers will give you volumes between certain spreads. But, what about the volumes within those spreads. This is where it matters how much investor folios and investor participation is there in your ETFs.
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