Surge in ETF Investments Marks Significant Shift in Indian Mutual Fund Landscape

Mumbai, October 12, 2024 – A recent study by Zerodha Fund House has revealed a substantial shift within the Indian mutual fund industry towards Exchange-Traded Funds (ETFs). These funds now account for nearly 13% of the total assets under management (AUM), amounting to ₹6.95 lakh crore out of ₹53.40 lakh crore, signaling their growing prominence as a preferred investment vehicle.

Broader Acceptance and Retail Adoption

The data indicates a remarkable surge in the number of accounts for both equity and debt ETFs, skyrocketing from 5.33 lakh in 2017 to a staggering 1.25 crore in 2023. This impressive growth underscores a broader acceptance and understanding of ETFs among retail investors. The proliferation of ETF accounts can be largely attributed to the democratization of investment opportunities and the inherent advantages they offer, such as lower costs, diversification, and ease of trading.

Volume and Market Growth

In terms of volume, ETFs have seen exponential growth from ₹26,139 crore in FY 2016-17 to ₹1,83,676 crore in FY 2023-24, reflecting an increase of over 600%. “This increase…reflects growing investor confidence and the maturation of the ETF market in India. In the last year alone, trading volumes of ETFs have surged by approximately ₹64,000 crore,” noted the study.

Dominance of Nifty-Based ETFs

The study highlights the dominance of ETFs based on the top three broad indices – Nifty 50 ETF, Nifty Next 50 ETF, and Nifty Midcap 150 ETF. Collectively, these ETFs account for more than 99% of the total AUM within the equity ETF schemes. Specifically, Nifty 50 ETFs have emerged as the leading contributor, holding 95% of the total AUM, which equates to ₹2,77,471 crore, as of March 31, 2024.

Diversification within Equity ETFs

The report also observes a diversification trend among equity ETF investors. Currently, equity ETF schemes comprise 8 broad-based indices and 40 individual schemes. This includes 18 Nifty 50 ETFs, 7 Nifty Next 50 ETFs, 5 Nifty Midcap 150 ETFs, 4 Nifty 100 ETFs, 2 each in Nifty Midcap 100 and Nifty Smallcap 250 ETFs, and one each in Nifty MidCap 50 and Nifty 500 ETFs.

Rapid Growth in Equity and Debt ETFs

Equity ETFs have experienced unparalleled growth from ₹43,234 crore in March 2017 to ₹5,63,176 crore in March 2024. Debt ETFs have also expanded significantly, increasing from ₹1,497 crore in March 2017 to ₹96,163 crore in March 2024. “The growth in debt ETFs has accelerated particularly from March 2019 onwards, reflecting a shift towards fixed-income securities in recent years,” the study adds.

Steady Rise of Gold ETFs

While not as pronounced as equities and debts, Gold ETFs have shown steady growth, climbing from ₹5,480 crore in March 2017 to ₹31,224 crore in March 2024. Between 2017 and 2024, Gold ETFs have grown by 470%, which pales in comparison to the 1,200% growth in equity ETFs and the 6,300% surge in debt ETFs.

Future Outlook

Vishal Jain, CEO of Zerodha Fund House, is optimistic about the future of the ETF market in India. “The ETF market in India is poised for continued growth. As more investors recognize the advantages of ETFs, the segment is likely to see increased inflows and diversification. The trend in passive investing is expected to persist, driven by retail investors in the coming years, as passive products are easy to understand, transparent, and affordable.”

New ETF Listings

Notably, Zerodha Fund House recently listed two new products – the Zerodha Nifty 100 ETF and Zerodha Nifty Midcap 150 ETF – on the stock exchanges as of June 19, 2024. These open-ended, passive, equity ETFs further diversify the options available to investors.

Conclusion

The growing adoption of ETFs marks a transformative phase in India’s mutual fund industry. With their cost-effective, transparent, and diversified investment options, ETFs are reshaping the way both retail and institutional investors participate in the financial markets.

Source: Zerodha Fund House Study