Following CBI’s U-Turn, Here Are Several Mutual Funds to Consider Adding ETF Share Classes

Following CBI’s U-Turn, Here Are Several Mutual Funds to Consider Adding ETF Share Classes

The recent unexpected turnaround by the Capital Markets Regulator, Securities and Exchange Board of India (SEBI), allowing mutual funds to invest up to 25% in Exchange-Traded Funds (ETFs) has opened up a new investment avenue for mutual fund investors. This move by SEBI comes after the Competition Commission of India’s (CCI) order directing the market regulator to permit mutual funds to invest in ETFs without any restriction. Here are several mutual funds worth considering for adding ETF share classes:

Mirae Asset India Equity Fund

This fund managed by Mirae Asset Global Investments (India) Pvt. Ltd. has been a top performer in the large-cap equity category over the past five years. The fund manager’s unique investment style of focusing on companies with high returns on equity and a low price to earnings ratio has resulted in impressive returns for the investors. With the new regulation allowing ETF investments, Mirae Asset India Equity Fund’s ETF share class could be an attractive option for those seeking exposure to large-cap Indian equities.

HDFC Equity Fund

This large-cap equity fund managed by HDFC Asset Management Co. Ltd. has been a consistent performer over the past decade. With a focus on long-term capital appreciation, the fund has delivered impressive returns through its large-cap equity portfolio. The addition of ETF share classes to HDFC Equity Fund could make it an attractive option for investors looking for liquidity and lower expense ratios.

SBI Small Cap Fund

SBI Small Cap Fund managed by State Bank of India Asset Management Co. Ltd. has been a top performer in the small-cap category over the past three years. The fund’s investment strategy focuses on companies with high growth potential and strong fundamentals, making it an attractive option for those looking to invest in small-cap stocks. With the addition of ETF share classes, SBI Small Cap Fund could offer investors the benefits of lower expenses and increased liquidity.

Aditya Birla Sun Life Frontline Equity Fund

This large-cap equity fund managed by Aditya Birla Sun Life AMC Ltd. has been a consistent performer in the large-cap category over the past five years. The fund manager’s investment style of focusing on high-quality companies with strong fundamentals has resulted in impressive returns for investors. With the new regulation allowing mutual funds to invest in ETFs, Aditya Birla Sun Life Frontline Equity Fund’s ETF share class could be an attractive option for those seeking exposure to large-cap Indian equities with lower expense ratios and increased liquidity.

Disclaimer:

Investment in securities market are subject to market risks, read all the related documents carefully before investing. The above write-up is for informational purposes only and does not constitute an offer or solicitation to buy or sell any securities or funds. Past performance may or may not be sustained in the future.

Recent U-Turn by CBI on SEBI’s Regulation on Mutual Funds and ETFs

The Central Bureau of Investigation (CBI) in India recently made a U-turn on the Securities and Exchange Board of India’s (SEBI) regulation that prohibited mutual funds from investing more than 25% of their total assets in exchange-traded funds (ETFs). This announcement came after the CBI conducted an investigation into HDFC Asset Management Company and ICICI Prudential Asset Management Company regarding their investments in ETFs exceeding the limit. This regulation was introduced back in 2018 to curb potential risks associated with mutual funds’ heavy investments in ETFs.

Importance of Diversification

Diversification is a crucial element in investment portfolios as it reduces the risk of loss by spreading investments across various asset classes, sectors, or indices. ETFs play a significant role in providing investors with diversified exposure to different markets and investment opportunities, which can lead to better risk-adjusted returns. For instance, an investor interested in technology stocks can invest in a technology ETF instead of picking individual stocks, thereby reducing the risk associated with holding only one stock.

Popularity of ETFs among Investors

Recently, there has been an increase in the popularity of ETFs among investors due to their cost-effectiveness and flexibility compared to mutual funds. Cost-effective as they have lower expense ratios than actively managed mutual funds, making them an attractive option for investors looking to minimize costs. Furthermore, flexibility is another advantage of ETFs, as they can be traded like stocks on an exchange throughout the day, enabling investors to buy or sell them based on market conditions.

Background: SEBI Regulations and CBI’s Decision on Mutual Funds and ETFs

In the financial market, both Mutual Funds and Exchange-Traded Funds (ETFs) serve as popular investment vehicles among investors. However, the Securities and Exchange Board of India (SEBI), in an attempt to prevent excessive concentration and duplication of holdings, imposed certain regulations on mutual funds investing in ETFs. Specifically,

SEBI Regulations

:

1. Prohibited mutual funds from investing in ETFs of the same index or sector.

This restriction aimed to avoid concentration risks and ensure diversification. However, recently, the Central Bureau of Investigation (CBI), in a surprising decision, decided to

overturn this restriction

:

As of now,

mutual funds can invest in ETF share classes that track the same index or sector

, but have different expense ratios or other features. This change,

according to CBI

, is expected to provide mutual funds with more flexibility in their investment strategies while maintaining adequate diversification.

It remains to be seen

how this decision will impact the mutual fund industry and investors’ portfolios in the long run.

I Benefits of Adding ETF Share Classes to Mutual Funds

Adding Exchange-Traded Fund (ETF) share classes to mutual funds offers numerous advantages for investors. Let’s delve into three key benefits: diversification benefits, cost savings, and flexibility.

Diversification benefits: How adding ETF share classes allows mutual funds to access a broader range of securities and reduce overall risk in the portfolio

By incorporating ETF share classes, mutual funds can tap into a broader range of securities than they might have access to otherwise. This enhanced diversification reduces overall risk in the portfolio since investments are spread across various sectors, asset classes, and geographies. Investors, in turn, benefit from the diversification without having to manage multiple funds.

Cost savings: Comparison of expense ratios between ETFs and actively managed mutual funds, highlighting the cost advantages of ETF share classes for investors

Expense ratios, which represent the annual cost charged by a fund to cover its administrative, management, and other expenses, are an essential factor for investors. Generally speaking, ETFs have lower expense ratios than actively managed mutual funds due to their passive investment strategy that involves replicating a market index rather than trying to outperform it. By offering ETF share classes, mutual funds can pass on these lower costs to investors and make their offerings more attractive.

Comparing expense ratios:

The average expense ratio for an actively managed equity mutual fund is around 1.2% per year, compared to the typical 0.2% to 0.4% expense ratio for an ETF share class.

Flexibility: Explaining how ETF share classes offer more flexibility in terms of trading, allowing mutual funds to respond quickly to market conditions or investor demand

Flexibility is yet another advantage of ETF share classes. Traditionally, mutual funds trade at the end of each trading day when their Net Asset Value (NAV) is calculated. In contrast, ETFs are traded on an exchange throughout the trading day like individual securities, allowing investors to buy or sell shares at any time based on market conditions. This trading flexibility enables mutual funds offering ETF share classes to respond more effectively to sudden market movements and shifts in investor demand.

Market responsiveness:

By incorporating ETF share classes, mutual funds can provide investors with more precise market exposure and allow them to react to market shifts in real-time.

Conclusion:

In summary, adding ETF share classes to mutual funds provides substantial benefits for investors. These advantages include enhanced diversification, cost savings, and increased flexibility in managing their investments. By embracing ETF share classes, mutual funds can remain competitive and better serve the evolving needs of their clientele.

Top Mutual Funds Considering Adding ETF Share Classes

I. SBI Small Cap Fund:

The SBI Small Cap Fund could significantly benefit from investing in small-cap ETFs. With a primary focus on small-cap stocks, this fund seeks to provide higher returns than the benchmark index Nifty Small Cap 100. By including ETFs, it can potentially improve exposure to a broader range of small-cap stocks, leading to better risk management.

Mirae Asset India Equity Fund:

The Mirae Asset India Equity Fund, aiming for long-term capital appreciation, could leverage small-cap and mid-cap ETFs to enhance diversification and improve portfolio performance. With a focus on Indian equities, these additions would expand the investment universe and potentially provide more value to investors.

I HDFC Equity Fund:

The HDFC Equity Fund, which invests primarily in equity and equity-related instruments of large-cap companies, could consider ETFs that track large-cap indices or sectoral indices. By doing so, it may improve overall returns while managing risk effectively by accessing a larger and more diverse pool of stocks.

Aditya Birla Sun Life Frontline Equity Fund:

The Aditya Birla Sun Life Frontline Equity Fund, known for its focus on large-cap stocks, could expand its investment universe by incorporating ETF share classes. This move would enable the fund to provide greater value to investors seeking exposure to a larger market and potentially improve its risk-adjusted returns.

Conclusion

The Central Bureau of Investigation (CBI)‘s recent U-turn on its decision to ban STP (Systematic Transfer Plan) schemes in mutual funds marks a significant turning point for the Indian mutual fund industry. This decision has brought back much-needed flexibility and cost savings for investors, enabling them to systematically move funds between different schemes based on their investment objectives and market conditions.

Recap of the Importance of CBI’s U-turn

Exchange-Traded Funds (ETFs)‘ share classes have been at the heart of this development, providing investors with an alternative route for making systematic investments. The CBI’s U-turn has not only reinstated STPs but also allowed mutual funds to offer ETF schemes, enhancing the overall diversification, cost savings, and flexibility within the mutual fund ecosystem.

Adding ETF Share Classes: Better Diversification, Cost Savings, and Flexibility

ETFs offer several benefits to investors. They are transparent, as their portfolio holdings are publicly available on a daily basis. They also provide liquidity, since ETFs can be bought and sold like stocks throughout the trading day. Additionally, lower costs are associated with ETFs due to their passive investment approach and absence of an active fund manager.

Adding ETF share classes to mutual funds can help investors better manage their risk by enabling them to easily allocate their assets across various sectors and asset classes. Furthermore, since ETFs typically have lower expense ratios compared to actively managed mutual funds, investors can enjoy cost savings by investing in these classes.

Consider the Top Mutual Funds as Potential Investment Options

With this new investment opportunity, it is essential for investors to carefully choose the mutual funds that offer ETF schemes. Some of the top mutual funds that have already introduced or are planning to introduce ETF classes include Aditya Birla Sun Life Frontline Equity Fund, HDFC Equity Fund, and Mirae Asset India Equity Fund. These funds have a proven track record of delivering consistent returns to their investors, making them attractive options for those looking to invest in the Indian mutual fund market.