In recent years, the investment world in India has seen a major shift. More people are moving from active funds to passive funds, which has led to a surge in demand for mutual funds and ETFs (Exchange-Traded Funds). This change reflects a growing preference among Indian investors for simple, long-term strategies to grow their wealth.
In fact, as of March 2024, ETFs now make up about 13% of the entire mutual fund industry in India, a big leap considering that ETFs were only introduced around 12 years ago. Since March 2020, the growth has been exceptional. Investor folios have increased by almost 2.5 times, with equity ETFs leading this rise. Nearly 85-90% of trading volume in ETFs is from equity-based ETFs, which clearly shows that Indians are now viewing ETFs as an appealing option for investment.
Why Consider ETFs?
Before jumping in, let’s quickly recap what ETFs are and what makes them unique. ETFs are investment funds that are traded on stock exchanges, similar to stocks. They combine features of both mutual funds and stocks, offering investors diversification along with the flexibility to trade throughout the day. However, there are three key aspects to keep in mind when investing in ETFs:
- AUM and Liquidity: An ETF with a high Asset Under Management (AUM) is typically more liquid. Low AUM can lead to liquidity issues, meaning it might be harder to buy or sell the ETF when you want. So, look for ETFs with good AUM to ensure smooth trading.
- I-NAV (Indicative NAV): Unlike mutual funds, ETF prices fluctuate throughout the day. The I-NAV provides a real-time snapshot of the ETF’s value. It’s better to track I-NAV for ETFs, as NAV only updates at the end of the day. I-NAV can usually be found on the Asset Management Company (AMC) website.
- Tracking Error: ETFs aim to follow a benchmark index as closely as possible. However, due to factors like trading costs, holding cash for redemptions, and liquidity of underlying stocks, there can be slight deviations. Ideally, look for ETFs with minimal tracking error, as this indicates they closely follow their index.
Recommended ETFs for Long-Term Investment
Let’s discuss some of the top ETFs that could work well for Indian investors focusing on long-term growth. This list includes broad market-based ETFs, Smart Beta ETFs, and an international ETF to provide geographical diversification.
1. Broad Market ETFs
Broad market ETFs track large indices like Nifty, giving you exposure to the overall market. For example, the Nifty Mid Cap 150 ETF has delivered solid returns over the past years and offers a balanced approach for those who prefer mid-cap investments. This ETF provides exposure to the mid-cap segment with relatively lower risk than small-cap ETFs. Among the available options, Mirae Asset Nifty Mid Cap 150 ETF is a good pick due to its lower expense ratio.
2. Smart Beta ETFs
Smart Beta ETFs aim to beat traditional market indices by focusing on specific investment factors. The Nifty 200 Momentum 30 is a great example. This ETF is based on the concept of momentum investing, meaning it invests in stocks that have shown strong recent performance. While this type of ETF might have slightly higher risk during market downturns, it can deliver strong returns when the market trends upwards. UTI Nifty 200 Momentum 30 Index Fund is a reliable choice here.
For a less volatile option, the Nifty 100 Low Volatility 30 index is worth considering. This index focuses on stocks with low volatility, making it a better performer during bear markets. ICICI Prudential Nifty 100 Low Volatility 30 ETF is a good pick, especially for those looking for stability.
3. International ETF (US Market Exposure)
Adding a global element to your portfolio can be beneficial, and the NASDAQ-100 ETF offers exposure to the US tech sector, which has historically outperformed many other markets. This ETF also benefits from currency appreciation, as the US dollar has generally strengthened against the Indian rupee. The Motilal Oswal NASDAQ 100 ETF is an ideal choice here, especially for long-term investors looking for geographical diversification and exposure to US tech giants.
Should You Invest in ETFs?
ETFs have rapidly gained popularity in India, and the trend is expected to continue. They provide a cost-effective way to diversify your investments, and the flexibility to trade them like stocks is an added benefit. With Indian markets becoming more mature, ETFs are poised to become an essential part of any investor’s portfolio.
If you’re already investing in ETFs, share your experiences with us in the comments. And if you’re new to ETFs, now might be the perfect time to consider them as part of your long-term financial strategy. Happy investing!