ETFs performed better than actively-managed equity mutual funds in FY23

• An analysis of the data shared by Value Research showed that ETFs were better performers than actively-managed equity mutual funds in 2022-23.
• The Nifty50 and the Sensex have slipped 0.6% and 0.72% respectively in FY23 as against two years of strong gains in FY22 and FY21.
• To add to the woes, mutual fund categories including large cap and mid cap have barely managed to outperform their benchmarks in FY23 in terms of average returns, as per reports.
• The biggest advantage for an ETF vis-à-vis actively-managed funds is the low-cost structure i.e low total expense ratio.

Amid high volatility in the equity markets, exchange-traded funds or ETFs fared better than actively-managed equity mutual funds in 2022-23, according to an analysis of data shared by Value Research. ETFs constituted three out of the top five equity-related funds delivering the highest returns in FY23.

Mutual funds are either actively or passively managed. Passively-managed funds include ETFs that replicate a particular index while actively-managed funds have a fund manager handpicking and actively managing the portfolio.

"The reasons behind the rising trend in ETFs goes back to over three years ago when large-cap and large-cap-oriented categories found it increasingly difficult to beat benchmarks for three reasons: one, the introduction of TRI (total returns index) as the benchmark, new SEBI categories with restricted investment universe, and inability of funds to take high exposure to stocks like their benchmarks given the individual stock cap under regulations,” Vidya Bala, co-founder, Primeinvestor.in told Business Insider India.

TRI was introduced to make things transparent and credible. It includes both the capital gains and dividend component to determine returns.

ETFs: Low-cost structure an advantage
ETFs are a type of pooled investment securities that operate much like a mutual fund but are bought and sold like shares on the exchange. The price of an ETF is tracked to an underlying index. For instance Kotak Nifty PSU Bank ETF will track the Nifty PSU Bank index.

The biggest advantage for an ETF vis-à-vis actively-managed funds is the low-cost structure i.e low total expense ratio.

“...ETFs being passive funds that mimic indices had no such restriction and could mirror the index and sail with their respective indices. And all of this at very low cost compared with the 1-2.5% expense ratio of active funds. Note that in an index, a stock that rallies naturally gains higher weight. An active fund may not be able to do the same,” added Bala.

Markets in FY23 have been volatile due to rising interest rates, high inflation, banking crisis in the US and Europe, and foreign institutional investor (FII) outflows from Indian equities.

The benchmark indices, the Nifty50 and the Sensex, have slipped 0.6% and 0.72% respectively in FY23 after registering two years of strong gains, in FY22 and FY21. To add to the woes, mutual fund categories including large cap and mid cap have barely managed to outperform their benchmarks in FY23 in terms of average returns, as per reports.

A Samco-Nielsen survey also shows that about 7 in 10 investors are unable to generate even benchmark index returns. Benchmarks represent an average performance of a group of top large company stocks. And outperforming the benchmark is important for an investor, as it means that the stock in her portfolio has beaten the average returns.

Top 5 equity-related funds of FY23
Here are the five equity-related funds that delivered the highest returns to investors in FY23:

Data source: Value Research

Nippon India ETF Nifty PSU Bank BeES
The ₹1,501 crore fund managed by Mehul Dama since November 2018 is an open- ended index scheme listed on the exchange in the form of an ETF that tracks the Nifty PSU Bank Index. It has a minimum investment of ₹10,000.

The fund gave 38.6% returns to its investors in FY23, and achieved a compounded annual growth rate (CAGR) of 45.28% in the last three years.

Kotak Nifty PSU Bank ETF
Another fund that recorded the highest returns in FY23 is also an ETF – Kotak Nifty PSU Bank ETF, which endeavors to mirror the returns given by the PSU Bank Index as closely as possible, post expenses.

The total expense ratio i.e. cost of managing a fund stands at 0.49% with net asset value (NAV) at ₹372.42 as on April 3. The assets of the fund stand at ₹1,269 crore and minimum investment amount in the ETF is ₹10,000.

ICICI Prudential Nifty FMCG ETF
The fund tracking the Nifty FMCG index is among schemes that provided the highest returns to investors in FY23 at 28.7%.

The ICICI Prudential Nifty FMCG ETF currently holds assets under management worth ₹73.46 crore. The expense ratio of the fund is 0.2% while the minimum lumpsum investment required is ₹1,000.

ICICI Prudential Infrastructure Fund
The thematic fund invests in companies belonging to the infrastructure and allied sectors. The fund has 51.4% of its investment in large-cap stocks, 9.95% in mid-cap stocks and 21.96% in small-cap stocks. Also, it has 1.3% of its investment in debt market securities.

In FY23, the fund delivered returns of 22.1%. The ICICI Prudential Infrastructure Fund currently holds assets under management worth ₹2,270 crore, and the expense ratio of the fund is at 2.24%. The minimum investment required to start investing in this fund is ₹5,000 with minimum systematic investment plan (SIP) investment at ₹100.

ICICI Prudential Bharat 22 Fund of Funds
ICICI Prudential Bharat 22 FOF is a fund-of-funds scheme with the primary objective of generating returns by investing in units of Bharat 22 ETF.

The fund has delivered 21.2% returns in FY23 with assets worth ₹89 crore and a minimum investment amount of ₹5,000.

Bharat 22 ETF was introduced by the government in the Union Budget 2017 as a vehicle to achieve its divestment target. The index comprises 22 stocks of central public sector enterprises (CPSEs), public sector banks and private companies that are strategic holdings of Specified Undertaking of the Unit Trust of India (SUUTI).

Top 5 actively-managed equity mutual funds of FY23
The top-performing actively-managed equity mutual funds have delivered relatively lower returns compared with the top-performing ETFs in FY23.

Here are the top 5 actively-managed equity mutual funds of the financial year:
Data source: Value Research

ICICI Prudential Infrastructure Fund figures in both the lists – top 5 equity-related funds delivering highest returns and the top-performing actively-managed equity mutual funds.

ICICI Prudential FMCG Fund
The fund primarily invests in companies related to the fast-moving consumer goods (FMCG) sector with an aim of matching the returns made by benchmark Nifty FMCG index. ICICI Prudential FMCG Fund has delivered 19.20% returns to investors in FY23.

Note that FMCG is among the top sectors that have performed better in 2023 so far because of increasing defensive bets amid an uncertain macro environment.

The total expense ratio i.e. cost of managing a fund of a regular scheme stands at 2.57% with the net asset value at ₹394.51.

Kotak Infrastructure and Economic Reform Fund - Standard Plan
The investment objective of the fund is to generate long-term capital appreciation by investing in companies involved in the economic development of India as a result of potential investments in infrastructure and unfolding economic reforms.

The fund follows the Nifty Infrastructure TRI as the benchmark index. The total expense ratio i.e. cost of managing a fund of a regular scheme stands at 2.46% with the net asset value at ₹38.42.

HDFC Infrastructure Fund
The scheme aims to invest in companies that are either engaged in or expected to benefit from the growth and development of infrastructure.

The total expense ratio i.e. cost of managing a fund of a regular scheme stands at 2.60% with the net asset value at ₹23.42.

Nippon India Power & Infra Fund
The open-ended equity scheme invests in companies that are engaged in the power and infrastructure space in India.

The fund size i.e assets under management of the scheme is ₹1,871 crore with a minimum investment of ₹5,000. The total expense ratio of the fund stands at 2.24%.


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