Nippon India ETF Head Chart Journey to around 10 million folios

Nippon Life runs India’s oldest Exchange Traded Fund (ETF)—Nippon India ETF Nifty BeES—and manages Its ETF has investor assets of Rs 65,000 crore. An ETF is a basket of securities that tracks an underlying index and is traded on exchanges.

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 heads ETFs at Nippon Life India and has previously worked with Benchmark MF, spoke to Mint on factors that drove ETF growth in India and the fund house’s own growth in the ETF space Is. Edited excerpts from an interview:

What is the reason for this ETF growth in India over the 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 many levers of growth. One is the introduction of CPSE ETF in 2014. When we launched government-mandated ETFs, investors took note. In India, we have seen that when the government uses a device or a product, it helps in the popularity of the product and takes it to the masses. Subsequently, the reclassification of the scheme by market regulator SEBI in 2017 has also helped.

Earlier, an actively managed fund could take only 50% of large-cap stocks, and between 50% of mid- and small-cap stocks, benchmarked against the Nifty 50 and outperformed. However, now there is a clear definition of what is large cap fund, mid cap fund and small cap fund and there is uniformity in comparison of different fund categories. Furthermore, active funds were earlier benchmarked only against the price return index, which was not appropriate as it did not take into account the impact of dividend payouts by the index components. The challenge of alpha-generation was earlier for active funds as well, but now it has become more pronounced. EPFO and pension fund money has also been one of the biggest factors contributing to the increasing size of assets under management of the ETF industry.

How would you summarize your ETF journey since Benchmark MF?

Since the time of Benchmark MF in 2001, we were the only fund house to talk about ETFs. We were selling a product with 40-50 basis point expense ratio when regular mutual fund schemes were being sold with initial issue expense of 6%, entry load of 2% and total expense ratio of 2.5%-3%. But we firmly believed that if something was growing in the US, it should gain traction in our markets as well.

What do you understand by 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 on the rise, but let me tell you that the factor-based index is as good as any other actively managed scheme. Therefore, even an active fund manager will use an investment style, be it value, momentum or growth. Therefore, the factors are nothing more than a quantity model with a fixed methodology, except where you have human intervention in active funds.

The maximum money that has been made today is due to two factors- low volatility and speed. Factors like speed, quality, low volatility affect the markets at different times. Therefore, it is as difficult for one to factor in the timing as it is for a fund manager to choose an outperforming stock.

This is why we think investors should use a combination of factors. We launched Alpha Low Volume primarily for this reason. We have seen that the returns of Alpha Low Volume are quite consistent. And only the speed factor has returned closer to the alpha low volume. However, on a risk-adjusted basis, Alpha scores higher than Low Volume Speed.

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

This is not just a circular but a reform that has been brought by SEBI (Securities and Exchange Board of India) for ETFs. The business development that SEBI has done for the growth of the industry is more. Globally, investors are not allowed to visit the fund house directly, but they can only buy and sell ETFs on the exchange. Market makers provide volume on the exchange in addition to the natural volume. Although SEBI was always clear on the appointment of market makers when an offer document was filed, they were not recognized as an entity in India. Now this has changed after SEBI’s circular.

The regulator also said that any investor who wants to do business directly with the fund house can do so only if the transaction value is 25 crores and above. So, a lot of these volumes where the transaction price is down 25 crore will now shift to the exchanges. Earlier, any investor with a lot size of Nifty (close to .) 1 crore value) can do business directly with the fund house. Whereas SEBI has given time till 31 October to the industry for this. 25 crore rule, this is an important step and should be implemented.

Your Banking ETF is your biggest sector ETF. Can you elaborate on this?

Banking ETFs are quite popular among investors. We also see many insurance companies investing in ETFs. There are certain rules that prevent insurance companies from investing in particular sectors beyond certain limits. But these limits do not apply through ETFs.

We saw a sharp divergence in ETFs in 2020 as compared to their underlying indices. Why is this?

This can always happen when there is a sharp volatility in the markets. However, the volatility you may have seen in our ETFs versus others will be less because in addition to market makers, we also have volume from natural investors. Therefore, market makers will give you volume between certain spreads. But, what about the volume within those spreads. This is where it matters how much of the investor folio and investor participation is in your ETF.