Rise of Exchange Traded Funds (ETFs) in Indian Mutual Fund Industry

Exchange Traded Funds (ETFs) have gained significant traction in the Indian Mutual Fund industry, with a study conducted by Zerodha revealing that ETFs now hold a substantial share of 13% or Rs 6.95 lakh crore of the total Assets Under Management (AUM) of Rs 53.40 lakh crore.

The number of ETF accounts has witnessed a remarkable surge, more than doubling from 5.33 lakh in 2017 to a staggering 1.25 crore in 2023, signifying a growing comfort and understanding of ETFs among retail investors.

ETFs, which are investment tools offering a diversified basket of assets like stocks, bonds, or commodities, trade on stock exchanges similar to individual stocks but function like mutual funds in terms of diversification.

Among the types of ETFs in India, Equity ETFs, Debt ETFs, and Gold ETFs are the most prominent categories that are attracting investors.

The study further highlights a trend towards diversification within the Equity ETF segment, where over 99% of the total AUM among broad indices is concentrated in major indexes such as Nifty 50 ETF, Nifty Next 50 ETF, and Nifty Midcap 150 ETF.

Nifty 50 ETFs dominate the landscape, accounting for 95% of the total AUM within Equity ETF schemes with an AUM of Rs 2,77,471 crore, followed by Nifty Next 50 and Nifty Midcap 150 ETFs, indicating a growing interest in diversification among investors.

Equity ETF schemes in India currently consist of eight broad-based indices and a total of 40 schemes, including popular choices like Nifty 50 ETF, Nifty Next 50 ETF, Nifty Midcap 150 ETF, Nifty 100 ETF, Nifty Midcap 100 ETF, Nifty Smallcap 250 ETF, Nifty MidCap 50 ETF, and Nifty 500 ETF.

Debt ETFs and Gold ETFs also play a significant role in the market, offering investors alternative options for diversification and risk management.

The trading volume of ETFs has witnessed a substantial 600% surge from Rs 26,139 crore in FY 2016-17 to Rs 1,83,676 crore in FY 2023-24, indicating the growing popularity of these investment instruments.

Vishal Jain, the CEO of Zerodha Fund House, emphasized that the trend in passive investing is expected to continue, driven by the transparency, affordability, and ease of understanding offered by passive products, especially among retail investors in the upcoming years.