Paper 5

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ArthPrabhand:AJournalofEconomicsandManagement Vol.1Issue4,July2012,ISSN22780629
ETFS VS INDEX FUNDS IN INDIA: GROWTH AND PROGRESS

PROF. (MRS.) PRASHANTA ATHMA*; MS. B. MAMATHA**
*Head, Department of Commerce, Osmania University College for Women, Koti, Osmania University, Hyderabad, A.P., India. **Faculty Member, Department of Commerce, Sujatha Degree College for Women, Abids, Hyderabad, A.P., India.
ABSTRACT Mutual Fund is a trust that pools money from a group of investors sharing common financial goals and invest the money thus collected into asset classes that match the stated investment objectives of the scheme. Latest Mutual Funds are Index Funds and Exchange Traded Funds. Index Funds (IFs) focuses on the performance of specific stock indices, as opposed to other types of ETFs that are based on oil or other commodities. Exchange Traded Funds (ETFs) are Mutual Funds which can be bought and sold in the stock market, just like any other stocks or shares. As far as investment is concerned, an Exchange Traded Fund is just a Mutual Fund and as far as buying or selling the Mutual Fund is concerned, an Exchange Traded Fund is just like a stock or equity which can be traded on stock exchange like NSE. The review of literature points out that the studies are based on tracking errors, risk returns, price Transmission etc. Though the Index Funds came in to existence in 1988 and ETFs in 2002, growth over a period of time is not reflected. Hence the study is undertaken to reflect upon the growth of Index Funds and ETFs over a period of time since their inception. PinnacleResearchJournals54 http://www.pinnaclejournals.com The study is based on secondary data covering a period of 14 years for Index Funds i.e. 1998 to 2011 since their inception where as in the case of ETFs; the study covers a period of 10 years i.e. 2002 to 2011, from the year of existence of ETFs. A comparative growth rate of the Number and NAV per share for IFs and ETFs shows that the CAGR during the period in terms of Number of Funds and NAV per share is more in case of ETF with 34.93% and 74.88% respectively compared to Index Funds with 25.85% and 31.57% respectively. Though there is a good growth in case of both the Funds in terms of the Number of Funds and NAV per share indicating that the future of these funds is bright in India, ETFs are a good investment suitable to the individual investors and professionals as they are low cost and more liquid. KEYWORDS: MF-Mutual Funds, IFs-Index Funds, ETFs-Exchange Traded Funds, NAV-Net Assets Value. ______________________________________________________________________________
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INTRODUCTION Mutual Fund is a trust that pools money from a group of investors (sharing common financial goals) and invest the money thus collected into asset classes that match the stated investment objectives of the scheme. The Fund manager manages the Mutual Fund and uses his investment management skills and necessary research works and ensures much better return than what an investor can manage on his own. The capital appreciation and other incomes earned from these investments are passed on to the investors (also known as unit holders) in proportion of the number of units they own. Mutual Fund first came from a Dutch Merchant ling back in 1774. In 1822, that idea was further developed. Mutual Fund was introduced in the year 1963 in India. From an historical point of view, Mutual Funds have been around four hundred years, but they are a relatively new investment phenomenon to novice investors. Mutual Funds are a conglomeration of stocks, bonds, securities and even real estate, put together by a smart Fund Manager who hand-picks winners for a winning combination.
BROAD MUTUAL FUND TYPES
Equity Funds
Money market/ Liquid Funds
Hybrid Funds
Debt/Income Funds
Gilt Funds
Others
PinnacleResearchJournals55 http://www.pinnaclejournals.com
Latest Mutual Funds are Index Funds and Exchange Traded Funds. Index Funds (IFs) focuses on the performance of specific stock indices, as opposed to other types of ETFs that are based on oil or other commodities. Index Funds are appealing to certain kinds of investors because they are inherently more stable than investing in specific stocks. Index Funds spread the risk factor over the entire index, as such; large institutional investors like pension funds as well as older individual investors who are looking to reduce the risk in their portfolios, often find Index Funds a preferable alternative to buying stock of individual companies. Exchange Traded Funds (ETFs) are Mutual Funds which can be bought and sold in the stock market, just like any other stocks or shares. As far as investment is concerned, an Exchange Traded Fund is just a Mutual Fund and as far as buying or selling the Mutual Fund is concerned, an Exchange Traded Fund is just like a stock or equity which can be traded on stock exchange like NSE. Most ETFs track an index. ETFs may be attractive as investment because of their low costs, tax efficiency, and stock like features. ETFs are listed on a recognized stock exchange. Their units can be bought and sold directly on the exchange, through a stockbroker during the trading hours.
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REVIEW OF LITERATURE Jonne M. Hill and Barbara Mueller (2001)1 made a research on ETFs and they concluded that Tracking errors and returns based on fund NAV relative to the index reflect some factors characteristic of the product structure. In addition, price-to-index returns and tracking error reflect ETF prices that are captured at a different time from the underlying index and the shortsupply and demand factors relevant to the ETF, as well as the hedging instruments used by the market makers. NAV tracking error is much lower than price-to-index tracking error and is the most useful measure in assessing the long-term characteristics of an ETF relative to its underlying index. Joel T. Harper, Jeff Madura and Oliver Schnusenberg.(2006)2 The objective of this study is to compare the risk and return performance of Exchange-Traded Funds (ETFs) available for foreign markets and closed-end country funds. We utilize 29 closed-end country funds (CEFs) for 14 countries over the sample period from April 1996 to December 2001. The performance proxies are mean returns and risk-adjusted returns. Results indicate that ETFs exhibit higher mean returns and higher Sharpe ratios than foreign closed-end funds, while CEFs exhibit negative alphas. This indicates that a passive investment strategy utilizing ETFs may be superior to an active investment strategy using CEFs. The findings reported here offer some insight on the relative advantages of each type of investment. Specifically, there may be some potential for additional types of ETFs that offer higher risk-adjusted returns than closed-end funds. Such ETFs may be able to offer higher risk-adjusted returns as part of an internationally diversified portfolio. Benchmark Funds Asset Management Company(2008)3 research department did research in early 2008 on the topic of Myth of Eternal Alpha It has often been argued that individual active fund managers are consistently able to exploit anomalies and aberrations that may exist in the market and while considering out performance/ under performance one should look at longer periods. J. Christopher Hughen, Prem G. Mathew (2009)4 The efficiency of international information flow: Evidence from the ETF and CEF prices stated that closed-end funds (CEFs) and exchange-traded funds (ETFs) differ in their liquidity and ease of arbitrage. We compare their price transmission dynamics using a sample of funds that invest in foreign securities and are most likely to show the deficiencies in the manner in which they process information. Our analysis shows that ETF returns are more closely related to their portfolio returns than are CEF returns. However, both fund types under react to portfolio returns but overreact to domestic stock market returns. A simple trading strategy using these results is profitable with roundtrip trading costs less than 1.38% for CEFs and 0.71% for ETFs. Sangheon Shin, Gke Soydemir (2010)5 Exchange- Traded Funds, persistence in tracking errors and information dissemination stated that tracking errors from 26 exchange-traded funds (ETFs) utilizing three different methods and test their relative performance using Jensen's model. We find that tracking errors are significantly different from zero and display persistence. Based on Jensen's alpha, risk adjusted returns are significantly inferior to benchmark returns for all ETFs with two exceptions at conventional significance levels revealing that passive investment
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strategy does not outperform market returns. We then examine the degree to which frequently used factors such as expense ratio, dividends, exchange rate and spreads of trading prices may be underlying sources of tracking errors causing this underperformance. RESEARCH GAP The above review of literature points out that the studies are based on tracking errors, risk returns, price Transmission etc. Though the Index Funds came in to existence in 1988 and ETFs in 2002, growth over a period of time is not reflected. Hence the study is undertaken to reflect upon the growth of Index Funds and ETFs over a period of time since their inception. OBJECTIVE OF THE STUDY The objective of the study is to focus on the growth of IFs and ETFs since their inception. SOURCES OF DATA The study is based on secondary data. The Secondary data sources include Fact sheets of Mutual Funds, Articles, News papers, SEBI Manuals, AMFI Reports and Websites. PERIOD OF THE STUDY The study covers a period of 14 years for Index Funds i.e. 1998 to 2011 since their inception where as in the case of ETFs; the study covers a period of 10 years i.e. 2002 to 2011, from the year of existence of ETFs. GROWTH OF INDEX FUNDS The growth of IFs in terms of the number of Funds and NAV is given in Table-1. PinnacleResearchJournals57 http://www.pinnaclejournals.com Starting with 1 IF in the year 1998 viz., UTI Master Index Funds Growth, the number of IFs increased to 25 by the end of the year 2011 registering a CAGR of 25.85%. Net Asset Value (NAV) is a term used to describe the value of an entitys assets less the value of its liabilities. The term is most commonly used in relation to open-ended or Mutual Funds due to the fact that shares of such funds are redeemed at their Net Asset Value. It may represent the value of the total equity, or it may be divided by the number of shares outstanding and, thereby, represent the per share Net Asset value. NAV as per IRDA is calculated as follows NAV = (Market Value of the Investment held by the Fund + Value of Current Assets-Value of Current Liabilities and provisions) /Number of units existing on valuation date (before creation /redemption of units)
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The Table-1 shows NAV per share over a period of time for the various IFs .The overall CAGR during the period is 31.57%. It can be observed that none of the IFs have a growth rate equal to or more than the overall growth rate .It is HDFC IFs which Rank Ist with a CAGR of 22.42% followed by ICICI Prudential IFs with 20.19%, Birla Sun Life IFs with 18.71% and SBI Magnum Index Fund with 18.44%. The last five ranks were scored by Taurus Nifty, IDBI Nifty Index, Tata Index Fund, ICICI Prudential Nifty Junior Index Fund and IDBI Nifty. Out of these 5 IFs, excepting Tata Ifs, all other IFs are just 2 years old. Though UTI Master IFs ,Principal IFs ,UTI Nifty IFs Franklin India IFs entered early in IF Market, their ranks are in the middle order viz., 13,18,15,16 respectively reflecting upon the fact that it is not the age of the Fund but their efficiency level that yields better results. GROWTH OF EXCHANGE TRADED FUNDS The growth of ETFs is presented in Table-2. ETFs came into existence in India in the year 2002 with Nifty Benchmark Exchange Traded Schemes. Starting with 1 in the year 2002, they have reached to 20 in number by the year 2011 registering a growth rate of 34.93%.Nifty Junior Benchmark Exchange Traded ranked 1st in NAV per share with a growth rate of 20.62% followed by Gold Benchmark Exchange Traded Scheme with 17.53%,Nifty Benchmark Exchange Traded Scheme with 17.34%, Reliance Banking ETF with 17.24%, and Kotak Gold ETF with 17.11% respectively. The last ranks (16, 17, 18, 19) were scored by Birla Sun Life Gold ETF, Motilal Oswal Most shares M 100 ETF, Motilal Oswal Most shares M 50 ETF and Motilal Oswal Most shares NASDAQ-100 ETF with growth rate of 2.48%,1.52%, -1.32%, and -12 % respectively. IFS VS ETFS: GROWTH RATE PinnacleResearchJournals58 http://www.pinnaclejournals.com A comparative growth rate of the Number and NAV per share for IFs and ETFs presented in Table-3 shows that the CAGR during the period in terms of number of Funds is more in case of ETF with 34.93% compared to Index Funds with 25.85% .There is a good growth in case of both the Funds in terms of the number of Funds and NAV per share indicating that the future of these funds is bright in India. Though ETFs made late entry into the capital market, the growth in NAV per share is very significant with74.88% compared to IFs where growth is only 31.57%.The reason for a significant growth in ETFs can be probably attributed to the introduction of Gold ETFs as Gold is considered to be a prestigious possession in India and the rate of gold is ever increasing. ETFs are a good investment suitable to the individual investors and professionals as they are low cost and more liquid.
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TABLE-3 IFS VS ETFS: CAGR No. Index Funds 1998 2011 CAGR (%) ETFS 2002 2011 CAGR (%) 1 20 34.93 96.72 25876.1 74.68 1 25 25.85 10 31.58 31.57 NAV per share(Rs)
Source: Compiled from www.moneycontrol.com CONCLUSION The popularity of ETFs has increased manifold attracting a lot of attention from both the investors and the market participants resulting in a continuous innovation in the ETFs. PinnacleResearchJournals59 http://www.pinnaclejournals.com ETFs are essentially IFs that are listed and traded on exchanges like stock. The introduction of Gold ETFs and growth in the prices of Gold has led to the increased performance of ETFs compared to IFs. ETFs can became best investment alternative if awareness is created among the investors. REFERENCES 1. Jonne M. Hill and Barbara Mueller, The appeal of ETFs (2001), Benchmark Mutual Fund 2. Joel T. Harper, Jeff Madura and Oliver Schnusenberg Performance comparison between exchange-traded funds and closed-end country funds (2006) 3. Benchmark Funds Research Department Myth of Ethernal Alpha (2008), by Benchmark Mutual Funds 4. J. Christopher Hughen, Prem G. Mathew The efficiency of international information flow: Evidence from the ETF and CEF prices (2009)
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5. Shin, Sangheon and Soydemir, Gokce, Exchange-Traded Funds, Persistence in Tracking Errors and Information Dissemination (2010). Journal of Multinational Financial Management, Vol. 20, Nos. 4-5 WEBSITES 1. www.mutualfundsindia.com 2. www.etftrends.com 3. www.indexfunds.com 4. www.moneycontrol.com 5. www.valueresearch.com
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TABLE-1 NAV OF IFS IN INDIA: GROWTH DURING THE PERIOD 1998-2011

1 NAME OF THE FUND UTI Master Index Fund Growth 2 3 4 5 6 7 8 9 10 11
(AMOUNT IN RS)
12 13 14 CAGR (%)
S.NO
YEAR
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
RANK
1998
10
14.43
12.85
9.88
9.05
11.79
16.11
24.02
33.806
46.95
45.88
48.375
55.31
57.08
13.25
13
1999
Principal Index Fund UTI Nifty Index Fund Franklin India Index Fund NSE NIFTY Plan Franklin India Index Fund BSE Sensex Plan Franklin India Index Tax Fund SBI Magnum Index Fund Birla Sun Life Index Fund. HDFC Index Fund Nifty Plan HDFC Index Fund Sensex Plan
10.18
10.17
8.143
7.376
9.331
12.305
17.131
22.923
30.928
30.999
31.764
36.723
37.78
10.61
18
2000
8.07
6.14
5.846
7.418
10.241
14.647
20.043
27.848
27.818
29.064
33.492
34.386
12.84
15
4
2000
10.46
8.08
7.3
9.197
12.65
18.36
24.99
34.64
34.882
36.49
42.27
43.48
12.61
16
2001
8.59
9.12
10.836
14.815
21.683
29.89
41.59
41.34
44.128
50.316
51.794
17.74
2001
8.22
7.44
9.418
12.71
18.111
24.583
33.933
34.043
35.759
41.209
42.358
16.07
2002
8.673
11.022,
15.032
21.243
29.272
39.125
37.871
39.366
45.757
47.116
18.44
2002
9.817
12.439
16.842
23.924
32.509
43.535
44.186
46.371
53.544
54.503
18.71
2002
9.634
12.099
16.136
22.861
31.119
41.994
39.274
40.746
46.8
47.894
17.4
10
2002
29.87
38.525
49.216
72.37
102.6
136.98
127.29
131.361
149.011
152.37
17.7
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11 2002 HDFC Index Fund Sensex Plus Plan ICICI Prudential Index Fund-Nifty plan LIC Nomura MF Index Fund Nifty Plan 30.44 39.506 54.694 83.664 113.68 161.27 156.39 178.023 215.679 226.71 22.24 1
12
2002
8.18
10.3
13.76
20.009
28.019
38.775
40.307
42.955
49.812
51.467
20.19
13
2002
9.107
10.21
12.16
16.727
20.242
26.653
25.78
26.046
29.631
30.579
12.88
14
Source:www.moneycontrol.com
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TABLE-1 NAV OF IFS IN INDIA: GROWTH DURING THE PERIOD 1998-2011 (AMOUNT IN RS)
1 S.N O YEA R NAME OF THE FUND LIC Nomura MF Index Fund Sensex Plan LIC MF Index Fund Sensex Advantage Plan Tata Index Fund-Nifty Plan A Tata Index Fund Sensex Plan-A Tata Index Fund Sensex Plan-B Canara Robeco Nifty Index Fund Reliance Index Fund Nifty Plan(G) Reliance Index Fund Sensex Plan(D) ICICI Prudential Nifty Junior Index Fund 1998 2 1999 3 2000 4 2001 5 2002 6 2003 7 2004 8 2005 9 2006 10 2007 11 2008 12 2009 13 2010 14 2011 CAGR (%) RANK
14
2002
9.111
10.28
12.179
17.537
23.947
30.853
28.4
29.283
33.808
33.662
13.96
10
15
2002
8.953
10.13
12.465
18.283
22.702
29.427
25.185
27.95
31.538
32.229
13.67
11
16
2003
11.4 11.65 7
9.365
13.628
19.706
26.832
26.75
27.7
32.659
32.892
12.49
17
17
2003
13.52
20.043
27.626
37.81
36.443
38.36
43.522
44.56
16.07
18
2003
18.007
18.007
18.007
18.007
18.007
12.1
14.112
14.568
-2.62
23
19
2004
10.73
12.74
17.29
23.39
23.33
24.6
28.37
29.215
13.34
12
20
2005
11.023
13.678
17.012
19.522
19.522
19.522
19.522
8.51
20
21
2005
11.755
16.067
16.067
21.981
23.464
23.464
23.464
10.38
19
22
2010
10.301
9.625
-3.36
24
23
2010
IDBI Nifty Index
10.22
10.435
1.02
22
24
2010
IDBI Nifty Junior Index Fund
10.144
8.547
-8.23
25
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25 2010 Taurus Nifty Index Fund 10.168 10.496 1.61 21
TOTAL(NAV)
10
24.6
41.6
49.1
2153
2228
2282
2503
2679
2867
2824
2812
2829
3158
31.57
NO.OF INDEX FUNDS
15
18
19
21
21
21
21
21
25
25
25.85
Source:www.moneycontrol.com TABLE-2 NAV OF ETFS IN INDIA: GROWTH DURING THE PERIOD 2002-2011
S.NO 1 YEAR 2001 2003 2007 2007 NAME OF THE FUND Nifty Benchmark Exchange Traded Scheme Nifty Junior Benchmark Exchange Traded Gold Benchmark Exchange Traded Scheme Kotak Gold ETF Kotak PSU Bank ETF Reliance Gold ETF UTI Gold ETF 2008 Kotak Sensex ETF Quantum Gold ETF Reliance Banking ETF 2009 2010 SBI Gold ETF Axis Gold ETF 2002 96.72 2003 122.06 20.19 2004 164.93 31.11 2005 233.15 50.27 2006 320.4 54.12 2007 439.4 85.94 1000 1017.2 304.36 2008 447.9 73.2 1243 1246 213.5 1229 1245 146.5 N/A 598.9 2009 464.41 84.98 1449.34 1452.78 278.55 1413.53 1452.50 157.83 N/A 770.83 1487.45
(AMOUNT IN RS)
2010 541.21 115.83 1737.44 1735.91 449.43 1688.81 1736.22 181.3 N/A 1043.47 1765.37 2039.9 2011 561.44 109.1 2242.28 2,240.76 405.74 2180.91 2241.83 187.53 N/A 1131.28 2284.48 2292.06 CAGR (%) 17.34 20.62 17.53 17.11 5.92 15.41 15.83 6.37 N/A 17.24 15.38 6 RANK 3 1 2 5 15 7 6 13 N/A 4 8 14
2 3 4 5 6 7 8 9 10 11 12
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13 14 15 16 17 18 19 20 2011 HDFC Gold ETF ICICI Prudential Gold ETF Kotak Nifty ETF-D Motilal Oswal MOSt Shares M 50 ETF Religare Gold ETF Birla Sun Life Gold ETF Motilal Oswal MOSt Shares M100 ETF Motilal Oswal MOSt Shares NASDAQ-100 ETF TOTAL(NAV) NO. OF EXCHANGE TRADED FUNDS 96.72 1 142.3 2 196 2 233.15 2 374.5 2 2847 7 6444 10 7559.7 11 1868.9 1910 492.6 77.54 1782.94 2228.7 7.855 104.2 21392 17 2296.8 2310 559.33 75.5 2304.29 2340.7 8.093 103.96 25876.1 20 10.86 9.97 6.56 -1.32 13.68 2.48 1.52 -12 74.88 34.93 10 11 12 18 9 16 17 19
Source:www.moneycontrol.com

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APJEM

ETFS VS INDEX FUNDS IN INDIA: GROWTH AND PROGRESS

BROAD MUTUAL FUND TYPES

Money market/ Liquid Funds

TABLE-1 NAV OF IFS IN INDIA: GROWTH DURING THE PERIOD 1998-2011

IDBI Nifty Index

IDBI Nifty Junior Index Fund

25 2010 Taurus Nifty Index Fund 10.168 10.496 1.61 21

NO.OF INDEX FUNDS

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