Passive Insights: How index funds and index ETFs grew in Q2FY24

6 Nov 2023 , 07:06 AM

What has triggered the passive investment story in India?

The shift towards passive index investments in India like index ETFs and index funds has been quite frenetic in the last few years. The passive fund story has been triggered by the investors finding them better alternatives due to their simplicity and lower costs. Also, as the Indian markets were becoming more difficult to beat, the shift towards passive funds was only gradual. The result has been a massive growth in index ETFs and index funds in the last 6 years. There are several reasons attributed for the rise of passive funds, but broadly it is about lower costs and therefore better risk adjusted returns. In addition, investors are increasingly veering towards the idea of relying on the index for large cap investing, over large cap funds. Most large cap funds have a problem of kurtosis and that has been impeding the performance of large cap funds in India. Above all, it is the unerring wisdom of the legendary Jack Bogle (founder of Vanguard) at play, “Why look for a needle in a haystack, when you can buy the entire haystack.”

How index ETFs have grown in the last 7 years in India

Today, passive investment through index ETFs and index funds has become a predominant and significant part of overall mutual fund AUM. The table below captures the gist the growth in index ETF AUM last few years. These are cumulative numbers

Period FY Reference	Equity ETF  (₹ in crore)	Debt ETF (₹ in crore)	Gold ETF (₹ in crore)	Silver ETF (₹ in crore)	Total ETF (₹ in crore)
Upto Mar-17	43,234	1,497	5,480	–	50,211
Upto Mar-18	71,841	2,017	4,806	–	78,664
Upto Mar-19	1,32,687	2,278	4,447	–	1,39,412
Upto Mar-20	1,29,751	16,640	7,949	–	1,54,340
Upto Mar-21	2,37,903	37,672	14,123	–	2,89,698
Upto Mar-22	3,49,330	61,256	19,281	777	4,30,644
Upto Mar-23	3,97,082	85,406	22,737	1,792	5,07,017
Upto Sep-23 #	4,68,926	89,521	23,799	2,291	5,84,537

Data Source: NSE (# refers to first half of fiscal year 2023-24)

Here are some key takeaways from the ETF growth story for the latest quarter ended September 2023, with a perspective view of the last few full years.

• The numbers say it all. The AUM of index ETFs has grown from Rs50,211 crore in FY17 to Rs5,84,537 crore as of September 2023. That is an 11-fold growth in a little over 6 years. Of course, some part of this accretion is from market accretion, since the indices have nearly doubled in this period. Even then, the bulk of the returns have still come from fresh flows into these index ETFs.

   

• Of course, equity index ETFs have dominated the market share but debt index ETFs are fast catching on. In fact, the growth in equity index ETFs and debt index ETF has been fairly rapid post the pandemic crisis of March 2020. While ETFs are a fairly old phenomenon, the silver ETFs have just been around for around 2 years. But, they still have some way to build AUM.

   

• As of September 2023 close, there were a total of 185 index ETFs in India, which comprised of 140 equity index ETFs, 23 debt index ETFs, 13 gold ETFs and 9 silver ETFs. There are a total of 68 different indices being tracked by index ETFs, which include 54 equity indices and 14 debt indices.

   

• What about the folios? Index ETFs alone have 121.25 lakh folios. Out of these individual retail investors account for 118.73 lakh folios or 98% of the total folios while the HNI investors account for 1.96 lakh folios or nearly 2%. The folios share of FPIs, banks and corporates are quite insignificant.

   

• However, the story entirely changes if one were to look at the AUM share of the various stake holders in index ETFs. Out of the total ETF AUM, corporates account for a whopping 90% of the overall index ETF AUM, HNIs account for 7%, Retail investors account for just 2% of the AUM, while banks and FPIs account for the balance 1% of AUM.

Clearly, the growth of index ETFs over the last 7 years has been frenetic, although the retail investors still need to account for a bigger share of the overall AUM.

How index Funds have grown in the last 7 years in India

Unlike index ETFs (which are exchanged traded products), index funds are like regular mutual funds that are based on day-end NAVs and where the fund offers repurchase and sale on a continuous basis based on the NAV linked prices. While index ETFs were based on real time prices linked to NAV values, the index funds are like regular mutual funds, in that they rely on day-end NAVs. As we shall see now, index funds are relatively smaller than index ETFs in terms of AUM. Here is the index fund story over the years.

Period FY Reference	Equity Funds (₹ in crore)	Debt Funds (₹ in crore)	Gold Funds (₹ in crore)	Total Funds (₹ in crore)
Upto Mar-17	2,452	–	–	2,452
Upto Mar-18	3,061	–	–	3,061
Upto Mar-19	5,237	–	–	5,237
Upto Mar-20	8,056	–	–	8,056
Upto Mar-21	18,107	883	–	18,990
Upto Mar-22	39,638	27,609	–	67,247
Upto Mar-23	55,557	1,05,219	–	1,60,776
Upto Sep-23 #	72,822	1,11,189	–	1,84,011

Data Source: NSE (# refers to first half of fiscal year 2023-24)

Here are some key takeaways from the index fund growth story for the latest quarter ended September 2023, with a perspective view of the last few full years.

• The numbers say it all. The AUM of index ETFs has grown from Rs2,452 crore in FY17 to Rs1,84,011 crore as of September 2023. That is a multi-fold increase over 6 years, but it is on an extremely small base, so numerical comparisons can be odious. Of course, some part of this accretion is from market accretion, since the indices have nearly doubled in this period. Even then, the bulk of the returns have still come from fresh flows into these index funds, especially considering that debt index funds have dominated this story.

   

• In contrast to the ETF story, debt index funds have dominated the market share but equity index funds are also fast catching on. In fact, the growth in Aum of equity index funds and debt index funds has been fairly rapid post the pandemic crisis of March 2020. In fact, the debt index fund growth was entirely a post-pandemic phenomenon.

   

• As of September 2023 close, there were a total of 189 index funds in India, which comprised of 105 equity index funds, 84 debt index funds. There are a total of 108 different indices being tracked by index funds, which include 37 equity indices and 71 debt indices.

   

• What about the folios? Index funds alone have 44.96 lakh folios as of September 2023. Out of these individual retail investors account for 41.84 lakh folios or 93% of the total folios while the HNI investors account for 2.866 lakh folios or nearly 6%. The folios share of FPIs, banks and corporates together account for 1% of total index fund folios.

   

• However, the story entirely changes if one were to look at the AUM share of the various stake holders in index funds. Out of the total index funds AUM, corporates account for a whopping 49% of the overall index fund AUM, HNIs account for 39%, and retail investors account for just 12% of the AUM. The AUM share of banks and FPIs in the total index fund AUM was quite insignificant.

Index funds have not shown the same enthusiasm as they started off with as many investors appear to have gravitated towards index ETFs due to their inherently lower costs and real time price availability.

How have passive flows panned out over the years?

We will now take a quick look at how the flows into index funds and index ETFs panned out over the year in terms of gross flows and net flows. Gross flows show the interest levels and net flows show the direction of flows. Let us look at the index ETFs first.

Period FY Reference	Mobilizations (₹ in crore)	Redemptions (₹ in crore)	Gross Flows (₹ in crore)	Net Flows (₹ in crore)
FY 2016-17	41,335	17,281	58,616	24,054
FY 2017-18	58,341	34,383	92,724	23,958
FY 2018-19	1,00,158	56,807	1,56,965	43,351
FY 2019-20	1,23,008	63,198	1,86,206	59,809
FY 2020-21	1,06,512	66,692	1,73,204	39,820
FY 2021-22	1,39,616	58,766	1,98,382	80,850
FY 2022-23	1,56,162	96,635	2,52,797	59,526
H1-2023-24 #	63,553	44,055	1,07,608	19,498

Data Source: NSE (# refers to 6 months data)

What would strike you is not the rather steady net flows the rapid spike in the gross flows. The gross flows are the sum of inflows and redemptions and that has gone up between FY17 and FY23 by nearly 4.5 times> That shows the rising volumes of trading that is happening in these index ETFs, hinting at a surge in investor interest.

Let us now turn to how the flows story look like for these index funds. The data available is for last 4 years prior to the first half of FY24. But that should offer the trends nevertheless.

Period FY Reference	Mobilizations (₹ in crore)	Redemptions (₹ in crore)	Gross Flows (₹ in crore)	Net Flows (₹ in crore)
FY 2019-20	8,222	3,205	11,427	5,017
FY 2020-21	12,880	8,301	21,181	4,579
FY 2021-22	55,920	11,161	67,081	44,759
FY 2022-23	1,26,511	30,840	1,57,351	95,671
H1-2023-24 #	20,699	16,501	37,200	4,198

Data Source: NSE (# refers to 6 months data)

Like in the case of index ETFs, even in the case of index funds, the growth has been very frenetic post the pandemic. If you ignore the latest half year, the one trend is the much better net flows in the case of index funds, as compared to index ETFs. However, that can be attributed to the higher share of debt index funds in the mix, where the stickiness tends to be higher by default. However, the moral of the story is that; passive funds are a narrative which have well and truly arrived in India.