Photographer: Dhiraj Singh/Bloomberg

Modi-Backed ETF May Fuel India Sales After $1.4 Billion Haul

  • Central Public Sector Enterprises fund triples target amount
  • ’Catalyst for broader development of ETFs in India’: Analyst

The success of an exchange-traded fund backed by Prime Minister Narendra Modi’s government may help boost the acceptance of such products in the world’s second-fastest growing ETF market.

Investors poured 92 billion rupees ($1.4 billion), or 3.7 times the targeted amount, into a fund of the top 10 state-run companies, according to Reliance Mutual Fund, which manages the pool. It was the third time in three years the government used the Central Public Sector Enterprises ETF, or CPSE, to raise assets. A first sale in March 2014 generated 43 billion rupees and a second tranche in January raised at least 45 billion rupees. Proceeds will be used to maintain public spending without increasing the fiscal deficit.

“India’s ETF market is expected to witness robust growth in the coming years due to the structural shift in asset-class preference from fixed income to equities,” Rajendra Prasad, an analyst at Karvy Stock Broking Ltd., said in an interview. CPSE is a “catalyst for the broader development of ETFs in India.”

Indian households are putting more money into financial assets as slowing inflation reduces the value of gold and Modi’s cash ban shock damps demand for real estate. Money managed by local ETFs have almost tripled to $6 billion in the past three years, the fastest pace after Japan, data from the Association of Mutual Funds in India show. The investments still make up just 2 percent of the industry’s total 18-trillion rupee assets, the data show.

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While the under-performance of portfolio managers has made ETFs into a $4 trillion industry globally, products linked to indexes are an emerging trend in India where money managers have produced market-beating returns by picking individual stocks. Local actively-managed equity funds have risen an average 20 percent annually over the past three years, versus a 13 percent gain in the benchmark S&P BSE Sensex, data compiled by Bloomberg show.

“Flows into Indian ETFs are less than those into mutual funds due to lower returns,” said Prasad. “This is partly due to information asymmetry in the Indian stock market that gives active managers an advantage.”

In the case of CPSE, retail investors put bids of more than 35 billion rupees, swayed by its performance. The fund has climbed 43 percent in the past year, more than double the gain in the Sensex, data compiled by Bloomberg show. The outperformance will help stoke interest for such products, according to Outlook Asia Capital Pvt.

“As the size of ETF assets grow, fund managers are now seeing a viable business model,” said Manoj Nagpal, chief executive officer at the Mumbai-based investor advisory firm. “More niche ETFs are getting filed with the market regulator. That’s a positive trend.”

Modi is using CPSE ETF to pare the government’s extensive ownership in companies including Oil & Natural Gas Corp., the largest explorer, and Coal India Ltd., the world’s top producer of the fuel. Separately, the state-run Employees Provident Fund Organization has put 181 billion rupees into shares via index-linked funds since it was allowed in 2015 to buy stocks, Labour Minister Bandaru Dattatreya told the Press Trust of India on the weekend.

The pension fund may invest up to 15 percent of its 1.4-trillion rupee ($21 billion) surplus into equities in the year starting April 1, PTI cited the minister as saying. That would mean an inflow of $3 billion, said Nagpal.

“Institutional investors will grow the ETF market for the next one to two years, followed by retail once they see size and liquidity,” he said. “In the meantime, the industry is getting ready by creating more products.”

In Japan, where ETF assets have more than doubled in three years to $193 billion, buying is driven by a central bank initiative. After exhausting more traditional forms of asset purchases, the Bank of Japan in 2011 began buying ETFs to stoke the economy. The BOJ owns about 66 percent of ETFs, making the country home to most of the 10 largest ETFs outside of the U.S., according to Bloomberg Intelligence.

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