Mutual funds ride on passive investing boom as India gets two auto sector ETFs

Passive fund investors in India will soon be able to invest in their favourite automakers such as Maruti Suzuki and Tata Motors via exchange-traded funds, as more and more mutual fund houses tap into growing demand for investment products that cost less than actively managed schemes.

ICICI Prudential Mutual Fund and Nippon Mutual Fund have filed documents to launch Nifty Auto ETFs, becoming the first two fund houses to do so. The ETFs will track the Nifty Auto Index, which comprises all major automobile manufacturers in India as well as top auto component makers.

There are a total of 15 companies in the Nifty Auto Index. The companies with the highest weightage are Maruti Suzuki, Tata Motors, Mahindra & Mahindra, Bajaj Auto, Eicher Motors, Hero MotoCorp and Bharat Forge. Tyre makers MRF and Balkrishna Industries, and battery makers Exide and Amara Raja are also part of the index.

New Auto ETFs

The two new ETFs will aim to provide returns that closely correspond to the total return of the benchmark Nifty Auto Index subject to tracking errors. The Nifty Auto Index gained almost 20% in 2021, a tad lower than the benchmark Nifty 50.

The new fund offers for both ETFs will open on Wednesday, January 5. The ICICI Prudential NFO will close on January 10 while Nippon ETF will end for subscription on January 14.

The two ETFs come at a time when passive funds have been recording strong inflows over the past several months, especially from do-it-yourself young investors who prefer low-cost products to active funds. Many fund houses have launched index funds and ETFs in recent months, and more such products are likely in coming months.

Rising AUM in passive funds

Indeed, data from the Association of Mutual Funds in India (AMFI) show that ETFs, other than gold ETFs, mobilised Rs 9,428 crore during November 2021 while index funds mopped up Rs 4,113 crore. In comparison, actively managed large cap equity funds received inflows of Rs 4,352 crore while flexi cap funds got Rs 5,408 crore.

Moreover, the net assets under management of ETFs jumped to almost Rs 3.65 lakh crore at the end of November 2021 from Rs 2.77 lakh crore at the end of April. The AUM of index funds doubled to Rs 4,0240 crore during this period. Not surprisingly, there has been a significant increase in ETF market share from 8.3% in November 2020 to 10.8% in November 2021, AMFI data show.

In November itself, two index funds and one ETF were launched. While HDFC MF launched a Nifty Next 50 index fund, ICICI Prudential MF rolled out a small cap index fund and DSP MF floated a Nifty 50 equal weight ETF.

Other fund houses that are particularly bullish on the passive theme include Motilal Oswal and Navi MF, which is led by Flipkart co-founder Sachin Bansal. On Monday, Navi MF announced its Nifty Next 50 Index Fund that will replicate the Nifty Next50. This fund has an expense ratio of 0.12% for the direct plan, making it the cheapest in its category.