Exchange Traded Funds best bet for risk-averse investors

Hyderabad: For many in India, investing in stock market is not the first option thanks mainly to the risks associated it. But it’s not that they don’t want to enjoy the fruits of the stock market booms.

They simply want to be risk-averse. For such people, exchange-traded funds (ETFs) and exchange-traded products (ETPs) present a best opportunity to enjoy good returns from their stock market investments without taking undue risks, according to Koel Ghosh, Business Head-India, S&P BSE Indices.

“ETFs and ETPs are a popular investment option globally due to low risks associated them. Till date, assets under management in this space crossed $4 trillion worldwide with over 6,000 ETFs, with US accounting for nearly 60 per cent of the total. It’s true that ETF segment is in nascent stages in India. But we are catching up fast as more and more institutions and individuals are taking the ETF route to invest in stock markets,” Ms Ghosh told The Hans India.

For uninitiated, ETF, like mutual funds, is a passive investment product that holds assets such as stocks, bonds and commodities. Its units are traded on the stock exchanges much like stocks. Till recently, gold ETFs were popular in India. In case of stock ETFs, a group of stocks measured by an index are bought by the fund so that the fund’s performance reflects the performance of the stock group, thereby eliminating risks associated with investments in a single stock.

For instance, BSE 100 ETF buys stock of the companies in BSE 100 list and this fund’s performance reflects that of the BSE 100. “In India, we had only six ETF products in 2005 with very miniscule assets. Today, our ETF segment has assets of $5 billion with 65 products. It’s relatively small number compared to the global markets, but we have been growing exponentially in last few years from $1 billion in 2010 to $5 billion now,” she explained.

Pointing out that there were several advantages associated with ETFs, she said: “Transaction costs are less while transparency is very high in ETF investments. Active mutual funds generally have expense ratio between 1.5 per cent and 2.5 per cent which is relatively very high as compared to ETF expense ratio range of 0.07 per cent to one per cent”.

S&P BSE Indices, a joint venture between S&P Dow Jones Indices, and BSE, has created over 70 indices from 19 diverse sectors so far. These indices are used as ETFs as well as benchmarks.

By P Madhusudhan Reddy