All About Passive Funds And ETFs
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00:00Hello and welcome to the Mutual Fund Show. I am Neeraj Shah. We are going to be talking
00:10about a specific subset within the MF space today and that's ETFs and kind of do it in
00:15a two-pronged way because there is a new ETF in the offering as well from the house of
00:19Mire. So, Siddharth Srivastava, Head of the ETF Products and Fund Manager at Mire Asset
00:23Johnson to talk about that offering and the group and the space at large as does Arnab
00:27Pandya, Founder of Moneyedu School. Gentlemen, both of you, thanks so much for taking the
00:32time out. Really good having you. I know it's been a while. Good seeing you on air. But
00:36I'll start this show with Siddharth, you. We know that ETFs turn out well from a perspective
00:45of costing, etc. What's the basic argument for ETFs in India vis-a-vis the non-ETF side
00:52of the mutual fund end?
00:53I think now we are having a good track record which just highlights that active mutual funds
01:00struggle to outperform the benchmark on a consistent basis. We may see some active funds
01:07doing well year one, year two and then end up performing, whereas ETF just removes that
01:13active fund manager risk, comes at a low cost, is transparent and you know what is happening
01:19in the portfolio itself. And that is why we are seeing that first the ETF adoption
01:24started for large caps, then it moved on to mid-caps and now you are seeing good amount
01:30of ETF appetite for smart beta funds and even for thematic funds.
01:35Okay. And in general, let me first take the question to Arnab. Arnab, what is your view
01:45on this whole, if I can use the term in a positive way, proliferation of ETFs and passive
01:51products if you will, and if on an average Arnab, if you were to build out a portfolio
01:59average risk appetite, average duration, average appetite like I said for risk, what is the
02:07quantum of passive slash ETF products would you recommend in a portfolio?
02:15So, first thing in terms of the proliferation of all these ETFs and other passive products
02:20which you see, you see there is also an industry angle to this, which is that the SEBI regulations
02:26say that within the active category, every fund house can have only one product. So,
02:34that by itself limits the number of products which a fund house can launch within the main
02:38categories. Obviously, the thematic category and the other such areas, you can have a lot
02:44of products. But here, when you come to the passive space, you have a lot of room to innovate
02:51because investors who already have plain well enough funds in their portfolio, who have
02:57built up the core of their portfolio, they can move on to many of these passive products,
03:02which give them a slightly different flavor or exactly what that portfolio needs. So,
03:07that is the thing in terms of the overall large number of funds which you are seeing.
03:12And you can see investor interest in all these kinds of funds. Now, if you look at
03:15the portfolio of an investor, at the moment, every investor, according to me, should have
03:21a mix of these active and passive funds. And for me, there are a few categories like the
03:27large caps, where there is a compelling reason for the inclusion of such funds. But overall,
03:33I mean, for as you said, for an individual, the situation will change according to each
03:40of their needs and all. But I would say that not more than 15 to 20% of their portfolio
03:45would go into these kinds of different kinds of passive products as of now. But as the
03:50field grows, the scope will also grow. But one more thing I also want to point out,
03:54one should not just look at the equity space. Because according to me, in the debt space,
04:01there is a room or rather, I would say there is a large scope for having a bigger part of
04:06the portfolio in these kinds of passive products. Okay. Interesting. Well, Arnab, you want to very
04:15quickly expand on that point that you made? Yes. So, for example, in the debt space,
04:22one of the big problems that a lot of investors have is planning for the long term, and which
04:28is where now you have these kinds of target maturity funds, where they are actually many
04:34of them, you can have them based on a particular index, so that you are getting a diversified
04:40debt portfolio. Plus, it removes a lot of the risk which normal debt investors would face
04:46over the time period. And it's actually ensuring that you can plan for the longer term in a better
04:52way. Okay. Siddharth, you agree with that? Yeah, I think it's high time that we see passive
04:58options on the multi-asset side and all the debt side also. In fact, very interestingly,
05:03now we are seeing that for target maturities, certain AMCs have filed for sector-specific
05:09target maturity funds, focusing on just NBFCs and HFCs. So, we are seeing innovation happening
05:16on debt side also now, and hopefully SEBI will allow multi-asset category to also come up
05:22on the passive side. They have floated a consultation paper around it. So, I think,
05:28gentlemen mentioned that passive, apart from the core strategies like Nifty, 50, Sensex,
05:34you can come out with a lot of innovative products, which either sits well in an investor's
05:38core portfolio or a satellite portfolio. Now, Siddharth, my question, because you guys have
05:44this Mirai Asset Nifty 500 multi-cap, 50, 25, 25 ETF, right? Almost everybody that we've spoken
05:50to last few years have said that, yes, the SPIVA scorecard shows that large caps have not managed
05:54to beat, mid-caps and small caps have. In a multi-cap, there is 50% exposure to mid-caps
05:58and small caps. Why should I choose a passive route wherein the active fund manager has a very
06:02high probability of actually beating the index? In fact, you'll be surprised to know that in last
06:07one year or so, large-cap funds have in fact outperformed the benchmark and mid-cap funds
06:15have struggled to outperform the 150 benchmark index. So, it's no more a large-cap phenomena.
06:22You see end-up performance happening even on the mid-cap side and I think this multi-cap idea is a
06:28very simple idea which can form part of any investor core portfolio. You know that through
06:33this product, via this investment in this index portfolio, you're getting 50 large-cap and 25
06:41mid-cap and 25 small-cap. So, it's simple, it's logical and in terms of asset allocation within
06:48equity, it makes a lot of sense. You're effectively telling investors that if you want a large-cap
06:54exposure but at the same time want mid-caps and small-caps as well and because let's say if there
06:59was a flexi-cap ETF that need not be so correctly defined as 50, 25, 25, the multi-cap ETF does that
07:05trick for you. Absolutely. If you look at Nifty 500 for example, which is a benchmark for a lot
07:10of flexi-cap funds, 72% is large-cap, 18% is mid-cap and 10% small-cap. If you look in last
07:17one to year, it's very difficult to say whether large-cap will do well or a mid-cap will do well
07:22or small-cap will do well. It's better to invest in a very sort of rule-based manner, some portion
07:28in large-cap and then a reasonable allocation in mid-cap and small-cap also. Okay. Now, Arnav,
07:34what is your view here and your view could be not to subscribe by the way because we should give that
07:38liberty to both experts to talk about the other end that way. The only difference Arnav that I
07:43usually hear people come and tell me, advisors come and tell me that, you know, NFOs, let's leave
07:48them out, let them perform for 6 months, 12 months and then we'll take a call because there are
07:52enough funds available. In the case of an exchange-traded fund, the performance metric or yardstick
07:58is that conversation is nullified if you will. What's the relevance of a product like this,
08:02Arnav, to your mind in an investor portfolio? So, the relevance of this kind of product is that
08:09see in the mid and small-cap space, specifically the small-cap space,
08:13it's very difficult to choose a fund which can actually give you or rather hit the mark in
08:21terms of performance because there is such a wide choice which is available. What you are doing
08:26through a product like this is having all of the holdings in a particular investment without
08:36having to take a risk on the fund manager. So, people who are not comfortable or rather who are
08:42not able to choose a fund manager because see performance varies and there are different ways
08:47in which an individual can choose a fund and stick to a fund manager and all that. For them, this is
08:53a product. So, for me, if you look at if there is an existing investor who already has exposure to
08:58these kind of things, many already have an exposure to multi-cap funds, for them there is no need for
09:03such a product. But if there are investors who have a problem in choosing which fund to invest
09:10in, for them this solves the problem and that is what a lot of passive products do. They take that
09:16question of making a choice out of the hands of the investor which often makes the job of investing
09:22in. Okay. Siddharth, final word to you. We have about 60 seconds. What's the expected return
09:30based on what this index has done in the past? On an average, what do you think an investor in
09:33such an ETF would get? I think, first of all, it's difficult to predict the return. Of course,
09:39of course. But based on past history. But I think our view is that from a near-ish three to five
09:44year point of view, market will roughly be around 13 to 15 percent. That's a broad benchmark Nifty
09:51we are talking about. So, I think a bit more kicker on that is something which multi-cap
09:56allocation should provide. But these valuation investors should come from a five-year mindset
10:01because I think a lot of returns have already happened. So, allocation should happen at least
10:05from a five-year point of view. Okay. And maybe we are the SIP approach might not be bad in a
10:12product like this because you don't know how multi-cap as a space would do in the next six
10:15months because of the valuations of the mid-cap and the small-cap end. So, you might want to maybe
10:18take it a SIP product as well. I know I said that there's relevance here, Siddharth, talking about
10:23the kind of returns. Gentlemen, both of you, thank you so much for taking the time out and
10:27speaking to us on this leg of the Mutual Fund Show. We have to wrap it up on the MF Show but
10:31stay tuned because a conversation with a management whose stock is very hot in the
10:37recent past is coming up next. Stay tuned.