ETFs emerge as preferred investment vehicle for institutions, led by EPFO

There are a few reasons for the rising interest of institutional investors in ETFs.

Institutional investors have shown high preference for Exchange Traded Funds (ETFs) and Fund of Funds (FoF) over other category of mutual fund schemes in the past three-four years. Of the total investments in ETFs and FoFs, at the end of August 2019, close to 93 per cent has come from institutional investors and a meagre 7 per cent from individual investors. Institutional investors include banks, insurance companies, Employees’ Provident Fund Organisation (EPFO) and other domestic institutions. Individual investors include retail investors and high networth Individuals (HNIs).

There are a few reasons for the rising interest of institutional investors in ETFs. First, a large part of the ETF investment is from EPFO. Two-and-a-half years ago, the government had increased the EPFO’s investment limit in ETFs to 15 per cent from 10 per cent. These ETFs also include SBI, UTI and LIC.

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Mutual fund distributors point out that the quantum of investments EPFO can make are in the range of Rs 12,000-15,000 crore, which is quite huge and shows the influential role the provident fund body plays. Besides, the very structure of ETFs work in institutional investors’ favour, which are more long-term than MFs.

Further, ETFs incur lower costs than active funds. Also, at times when it is difficult to identify alpha or returns higher than the benchmark in active funds due to slowdown, investment in ETFs becomes a prudent choice.
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