Expanding Horizons: Several Mutual Funds to Consider Adding ETF Share Classes After CBI’s U-turn
With the Securities and Exchange Board of India (SEBI)‘s recent U-turn allowing mutual funds to launch ETFs with multiple classes, investors now have an opportunity to broaden their investment horizons. The move comes after the Central Board of Indirect Taxes (CBI) decided to exempt ETFs from the Securities Transaction Tax (STT). Here are some mutual funds that could benefit from adding ETF share classes:
SBI Mutual Fund
The SBI Small Cap Fund
(ETF)
could be a valuable addition to investors’ portfolios, given the small cap segment’s potential for high growth. The mutual fund has performed well in the past but comes with a relatively high expense ratio and a large AUM (Assets Under Management). An ETF share class could help mitigate these issues by offering lower expenses and greater liquidity.
HDFC Equity Fund
Another mutual fund to consider is the HDFC Equity Fund
(ETF)
, which has a solid track record of delivering consistent returns. The fund’s large AUM, however, might make it less agile in responding to market changes. An ETF share class could provide investors with greater control over their investments while keeping costs low.
Mirae Asset India Equity Fund
The Mirae Asset India Equity Fund
(ETF)
is an actively managed fund that has demonstrated impressive performance in the Indian equity market. Its high expense ratio could be a deterrent for some investors, making an ETF share class an attractive alternative to access the fund’s expertise with lower costs.
Aditya Birla Sun Life Frontline Equity Fund
Lastly, the Aditya Birla Sun Life Frontline Equity Fund
(ETF)
is a well-diversified fund with a strong focus on large-cap stocks. With its extensive holdings, the fund could benefit from the added liquidity and flexibility that an ETF share class offers. Lower expenses would also help attract more investors to this promising investment opportunity.
Note:
This list is not exhaustive, and investors should do their due diligence before making any investment decisions based on this information.
RBI’s Game-Changer Announcement: Mutual Funds Dive into ETFs
I. Introduction
Recent Development: RBI Allows Mutual Funds to Invest in ETFs
In a groundbreaking move, the Reserve Bank of India (RBI) announced on [Date] that mutual funds could invest in exchange-traded funds (ETFs) through their passive fund schemes. Previously, Indian mutual funds were barred from investing in ETFs directly. This change in policy carries significant implications for investors.
Previous Restrictions and Their Impact on Investors
Before this announcement, mutual funds in India could only invest indirectly in foreign ETFs through the Participatory Notes (PN) route. This restricted access to global markets and limited potential for diversification, resulting in higher costs and increased risks for investors.
Timeline and Key Points from the RBI Announcement
a. January 2014: The Securities and Exchange Board of India (SEBI) allowed mutual funds to invest up to 15% in index-linked funds, paving the way for potential ETF investments.
b. December 2019: SEBI relaxed norms to enable mutual funds to invest in debt ETFs.
c. [Date, 2023]: RBI permits mutual funds to invest in ETFs through their passive fund schemes.
The Power of Diversification in Investment Portfolios
Understanding Mutual Funds, ETFs, and Their Differences
Before discussing the importance of diversification, it is crucial to understand the differences between mutual funds and ETFs. Mutual Funds are investment vehicles where investors pool their money together, and a professional manager makes the buying and selling decisions on their behalf. In contrast, ETFs are investment funds that trade like individual stocks on a stock exchange.
Benefits of Investing in Both Types of Funds for Diversification
Both mutual funds and ETFs can contribute to a well-diversified investment portfolio. Mutual Funds offer access to various asset classes, sectors, and geographies through a single investment vehicle. On the other hand, ETFs provide investors with exposure to specific market sectors or indexes by tracking their underlying indices.
Mutual Funds Eyeing ETF Expansion: A Closer Look
With the RBI’s change in policy, several mutual funds are exploring the addition of ETF share classes to their offerings. This article will outline some mutual funds worth considering for such an expansion.
Background and Context:
Explanation of the mutual fund industry in India, its growth, and current trends
The mutual fund industry in India has witnessed significant growth over the past few decades. With more than 4 crore active investors as of March 2021, this sector manages an impressive assets under management (AUM) of over INR 35 lakh crore. Some of the key players in this industry include SBI Mutual Fund, HDFC Mutual Fund, ICICI Prudential Mutual Fund, and Mirae Asset India Mutual Fund.
Number of investors, assets under management (AUM), and key players
The increasing number of investors and the significant AUM can be attributed to various factors such as financial literacy, ease of investing through digital platforms, and a growing economy.
Shift towards passive funds, ETFs, and index funds
A notable trend in the mutual fund industry is the shift towards passive investing. Passive investment vehicles such as exchange-traded funds (ETFs) and index funds have gained popularity due to their lower expense ratios, transparency, and ability to track broad market indices.
Shift towards passive funds
In India, the inflow into passive mutual fund schemes has been increasing steadily over the years. As of March 2021, passive schemes accounted for approximately 15% of the total AUM.
ETFs and index funds
ETFs, which provide the benefits of passive investing with the added flexibility of being traded intraday, have garnered a significant following. As of March 2021, India had 34 listed ETFs with a total AUM of INR 98,652 crore. Index funds, on the other hand, have been around for longer and had an AUM of over INR 1.3 lakh crore as of March 202
RBI’s stance on mutual funds investing in ETFs: A historical perspective
Previous restrictions and reasons behind them
Initially, the Reserve Bank of India (RBI) did not allow mutual funds to invest in ETFs due to concerns over liquidity and potential systemic risks. However, as the mutual fund industry grew more mature and the regulatory framework became stronger, these restrictions started to be relaxed.
Gradual relaxation of these rules over the years
The RBI first allowed mutual funds to invest up to 10% of their total AUM in index ETFs in October 2007. In December 2014, the limit was increased to 25% of the total AUM. Finally, in October 2017, mutual funds were permitted to invest up to 30% of their total AUM in index ETFs.
The impact of the RBI’s U-turn on mutual funds and their investors
Opportunities for enhanced diversification and flexibility
The RBI’s decision to allow mutual funds to invest in ETFs has provided investors with more opportunities for diversification and flexibility. Mutual funds can now access a broader range of asset classes through ETFs, thereby enhancing their investment offerings.
Potential risks, challenges, and considerations
Despite the benefits, there are potential risks and challenges associated with mutual funds investing in ETFs. These include tracking errors, liquidity risks, and operational risks. Investors should carefully consider their investment objectives, risk tolerance, and investment horizon before investing in such schemes.
Mutual Funds to Watch: Expanding into ETF Share Classes
As the mutual fund industry evolves, more funds are considering expanding their offerings to include exchange-traded fund (ETF) share classes. In this article, we’ll explore several mutual funds worth watching and discuss the potential benefits of ETF shares for each.
I Mutual Funds to Watch:
HDFC Equity Fund
Description and investment strategy: The HDFC Equity Fund is a large-cap equity fund that focuses on investing in high-growth companies listed on major Indian stock exchanges. It follows a value and growth investment approach, seeking to deliver long-term capital appreciation to investors.
Performance history and key metrics: Over the past 5 years, the HDFC Equity Fund has delivered an average annual return of 13.6%. Its current expense ratio is 0.92%, making it one of the most cost-effective large-cap funds in India.
Reasons for considering adding ETF share classes: By offering HDFC Equity Fund as an ETF, the fund could attract a larger investor base due to lower minimum investment requirements and increased liquidity.
SBI Small Cap Fund
Description and investment strategy: The SBI Small Cap Fund is designed to invest in companies with a market capitalization between INR 5-20 billion, providing investors exposure to the small-cap segment of the Indian equity markets. It follows a bottom-up investment approach to identify companies with strong fundamentals and growth potential.
Performance history and key metrics: With an average annual return of 15.3% over the past 5 years, the SBI Small Cap Fund has outperformed its peers in the small-cap category.
Rationale for exploring ETF share classes: With the increasing popularity of ETFs and their lower cost structure, offering an ETF class for this fund could help attract a wider audience and boost its competitiveness in the small-cap space.
Mirae Asset India Equity Fund
Description and investment strategy: The Mirae Asset India Equity Fund follows a bottom-up, research-driven approach to invest in high-quality companies with strong fundamentals and growth potential across various sectors and market capitalizations.
Performance history and key metrics: This fund has returned an average of 19.5% annually over the past 5 years, making it one of the top-performing large-cap equity funds in India.
Explanation of why this fund, with its focus on large-cap stocks, could benefit from ETF share classes: ETFs can offer increased liquidity and lower costs, making them an attractive option for both domestic and international investors looking to invest in Indian equities.
Axis Long Term Equity Fund
Description and investment strategy: The Axis Long Term Equity Fund follows a disciplined, value-oriented approach to invest in stocks with a long-term perspective.
Performance history and key metrics: With an average annual return of 15.3% over the past 5 years, this fund has consistently outperformed its benchmark index and category peers.
Reasons for considering ETF classes: Offering an ETF class for this fund could provide investors with more flexible, cost-effective investment options, potentially attracting a larger investor base.
E. Aditya Birla Sun Life Frontline Equity Fund
Description and investment strategy: The Aditya Birla Sun Life Frontline Equity Fund follows a fundamental research-driven approach to invest in high-quality large-cap and mid-cap stocks.
Performance history and key metrics: Over the past 5 years, this fund has returned an average annual return of 17.8%, making it one of the top-performing equity funds in India.
Discussion of how adding ETF share classes could help this fund cater to the evolving investment needs of its investors: Offering an ETF class for this fund would provide investors with increased liquidity, lower costs, and potentially attract a larger investor base.