Index funds a big draw as market volatility rises

Mumbai: In times of high market volatility retail investors are relying more on index funds and other exchange traded funds (ETFs) for putting their savings as these are cost effective compared to other mutual fund schemes and less risky than investing in individual stocks. Index funds have seen inflows worth over Rs 59,000 crore during the last one-year period.

Index funds are mutual funds that invest in a specific stock exchange index like Sensex, Nifty-50 and several others. The portfolios of these funds primarily replicate a stock market index. This has heralded a new trend in stock market investing in India as this also offers diversification in investing and opens doors for investment in global stocks, gold, silver among other asset classes.

The ‘other schemes’ category—which typically has subcategories of ETFs (other and gold), index funds and funds of funds overseas—continues to see gain a lot of traction. The other schemes category saw net inflows worth Rs 41,226 crore in the first quarter of financial year 2022-23, according to a report by Morningstar, a US-based firm that tracks trend in the Indian mutual fund industry.

“The other schemes category, composed of index funds, gold ETFs, other ETFs, and global funds of funds has had phenomenal flows over the past year and a half. Most subcategories have experienced positive flows all through the quarter ended June 2022,” Morningstar said.

With uncertainty in the markets caused by the impact of rising interest rates, negative real rates across many economies, investors flocked towards gold, which is considered a safe haven and an inflation hedge. After witnessing net outflows in the previous quarter, gold ETFs bounced back with net inflows of Rs 1,439 in the quarter ended June 2022.

Global funds offer much needed and additional diversification in any portfolio. From that perspective, the category’s positive flows are a good sign and indicate that Indian investors are gradually opening to global investing.

In the current financial year, 12 new schemes were launched that focused on overseas investing, bringing the total to 46 schemes. The category had net inflows of Rs 624 crore during the April-June quarter and over Rs 7,000 crore during the last one-year period. The total assets under management (AUM) of ‘fund of funds’ investing in global stocks stood at Rs 19,296 crore. Fund of funds invest in other mutual fund schemes instead of investing in individual stocks.
Given the rise in flows in global funds, the Indian mutual fund industry crossed the mandated limit of $7 billion for overseas investments in January. Regulator Sebi then directed fund houses to stop investment in schemes that invest in overseas stocks, which led to a sudden halt in flows into this category. This restriction has been lifted in late June following a steep correction in overseas stock markets.

The assets in ‘other schemes’ continue to grow from strength to strength in each quarter. As of June 2021, the AUM for funds in the other schemes category was at Rs 521,106 crore. The index funds among these added over 59,000 crore inflows since June 2021 as assets under index funds rose from Rs 33,824 crore on Sept.30, 2021 to Rs 83,408 crore on June 30, 2022.

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