The rise of ETFs in India
===

Ali Curi: Markets ConversatION is an ION podcast where we discuss topics of importance to capital market participants with product owners, subject matter experts, and industry leaders. 

Sandeep Sabnani: India is a very price conscious market and ETFs being low cost are a perfect fit for India's investors, especially retail investors.

In addition to this, ETFs also offer a diversified sort of exposure to various sectors in India which make them an even more attractive choice for the Indian investor. 

Ali Curi: Hi everyone, and welcome to Markets ConversatION, I'm Ali Curi. 

On today's episode, Sandeep Sabnani from ION Markets and Anil Ghelani from DSP Investment Managers will discuss the remarkable growth of ETFs in India, or Exchange Traded Funds.

With increasing assets under management, the number of funds and traded volumes, the ETF market in India is booming. Sandeep and Anil will share their perspectives on the factors driving this growth, the challenges faced by asset managers, and the technological solutions on the horizon. It will be an exciting episode through the evolving landscape of ETFs in India.

Let's get started. 

Sandeep Sabnani, welcome to the podcast.

Sandeep Sabnani: Hey Ali, thank you for having me. It's great to be here.

Ali Curi: And also joining us, a guest of the podcast, Anil Ghelani with DSP Investment Managers. 

Hi Anil, welcome. 

Anil Ghelani: Hi Ali, thanks a lot for having me. 

Ali Curi: Thank you for joining us. Sandeep, will you please briefly share with us your background and your role at ION?

Sandeep Sabnani: Sure. So I've been a part of the capital markets community for the past 13 years and have had several roles from engineering to product leadership across ION and other firms such as Ericsson and Revolut. In my current product leadership role at ION, I am focused on the strategic growth of our equities products Where I help evaluate new product and market opportunities And connect the most promising and impactful opportunities globally to new and existing products.

Ali Curi: Thank you, Sandeep. And Anil, please tell us about DSP Investment Managers and your role there at DSP. 

Anil Ghelani: DSP is one of the leading asset management firms in India. We are part of around 160 year old DSP group, which has been one of the founding members of the Bombay Stock Exchange, here in India. I have been associated with the DSP group for about 21 years now in multiple roles.

In my current role, I'm looking after ETFs and passive investments, which is a very exciting and a very fast growing segment of the asset management industry in India currently. 

Ali Curi: Great, thank you. Well, gentlemen, let's get into it. 

Anil, let's start with you. Will you briefly explain ETFs and why has there been consistent growth in India? What are some reasons for this growth? 

Anil Ghelani: Surely, I think ETFs is a very unique investment security. It blends two areas, one, the simplicity of being able to track a particular index, and the second is the ease of owning it in small bite sized amounts. In India, we have seen a good growth, as you very rightly mentioned, for many reasons.

A couple of reasons that can be discussed at top of mind would be that in a lot of ways, this simple kind of investment solution, whereby there is an ease of understanding, there is a cost, which is low. This helps in enhancing the acceptability of ETFs for individual investors, as well as large corporate and institutional investors.

Second, since the past about eight, 10 years, we have seen the government of India has been using ETFs for some of their disinvestments, both across equities and across fixed incomes. So that has helped a lot in enhancing the awareness about ETFs and the acceptability of ETFs in the Indian investment industry.

And the last point, third point would be that somewhat in line with the global trends, even in India, over the past couple of years, actively managed funds have been finding it difficult to outperform the underlying benchmark on a consistent basis. There will always be some good managers who can beat the benchmark, but with this certain investment advisors, as well as some set of investors have been gradually aligning themselves and using ETFs as simple low cost products to gain access to the markets.

So this has been a phenomenal growth and over the past couple of years, we have seen whereby about let's say 10 years back, total size of such passive funds was about 3 to 4 percent of the industry. We have now increased to about 17 to 18 percent of the total Indian asset management industry. 

Ali Curi: And Sandeep, what is your take on this growth? 

Are there any factors unique to India that are helping to drive this growth? 

Sandeep Sabnani: Yeah, so as Anil touched on, India is a very price conscious market and ETFs being low cost are a perfect fit for India's investors, especially retail investors. In addition to this, ETFs also offer a diversified sort of exposure to various sectors in India, which make them an even more attractive choice for the Indian investor.

So be it institutional or retail, they give everyone an opportunity to be a part of India's growth story, which fuels for the growth for India as an investor and as a country. 

Ali Curi: Great gentlemen, let's talk about challenges for asset managers. Anil, let's continue with you. What challenges does the growth of ETFs pose for asset managers? And how are they responding to these challenges?

Anil Ghelani: That's a great question because on one side, yes, there is a huge growth in AUM or Assets Under Management, which structurally is a positive because we are seeing growth in the business. No doubt about it. But yes, there are certain challenges which come along with it, for example, as we see increasing adoption of various ETFs, there always comes a question mark in terms of how the active management is doing or going to do in [the] future.

If we take a hint from what has happened in some of the global markets, let's say in the US market, after about one decade of period where passive funds saw higher inflows as compared to active. Now as at end of the 2023 data, passive funds have in fact outpaced and the total size is higher than the total size of active funds.

Now when such kind of drastic change happens, of course, eventually, I'm not saying it will happen overnight. It is important for asset managers to be able to align their thinking, their business model, their outreach to clients in a suitable way. So for example, we over here at DSP and structurally when we talk to our client, we are very clear that we don't much talk about active versus passive, but we are trying to position to the advisors and their investors, how they can use both active and passive as a complementary strategy rather than competing strategy. So as this kind of growth happens and markets evolve, I feel that asset managers who are able to successfully pivot from the focused area of only being boutique active managers, they will be in a good position to create successful strategies, which can result into net/net win/win solution for the client as well as for the asset managers. 

Ali Curi: Anil, let's talk about the role that brokers play in this ETF market. What do asset managers need from brokers to support the continued growth of the ETF market?

And Sandeep, please share your thoughts as well. 

Anil Ghelani: That's a great question, Ali. And I believe that brokers form a very important part of the ecosystem of ETFs. Like you already spoke earlier, today for all our execution, whether it's execution during the intraday market of our ETF baskets, or it is execution of certain rebalance trades of the ETF to align our portfolios with the index constituents, the brokers have a great way of executing trades, giving fills so that we are able to track our portfolio in a very smooth way. So that part is a very important piece, which is very much intact, and there is a very robust community of brokers in Indian markets, which are supporting all of us as ETF managers in a great way.

One additional area, which I believe is the growing importance of market making. Today, few of these brokers are providing market making services as well, and I strongly believe that gradually this is gonna increase even more. And as more number of brokers become market makers as well for the ETFs, it'll be huge help and boost for the overall India ecosystem because it can provide increased debt and liquidity on bid offers and reduce the spreads and hence the convenience and the cost of clients can be much more enhanced. 

Sandeep Sabnani: It's a very interesting take, Anil, there. So from my perspective, Ali, brokers need to be agile and responsive to the asset managers needs. So if, for example, Anil needs something, the brokers should be able to facilitate that.

What this means is providing them with access to various trading platforms, ensuring the ETFs are distributed widely to both institutional and retail investors. In addition, brokers must also be able to provide a straight of the art advanced tools such as algos and also ensure regulatory compliance in a complex market such as India.

An additional point that Anil mentioned was around "baskets" that becomes another important facet of this offering where the brokers must be able to understand and manage the baskets that the asset managers are asking them to execute. And the rebalancing conversation that we just had before comes into play once again, why are this, why this angle?

Ali Curi: Sandeep, let's continue with you. What are some broader perspectives on the ETF growth in India? For example, how has the regulatory environment in India influenced the growth of ETFs? And how are the global trends in the ETF market influencing the Indian ETF landscape? 

Sandeep Sabnani: That's a very interesting question, actually, because India's regulator has been at the forefront of a lot of innovation that is happening in the capital markets industry.

So the regulatory environment in India has for ETFs played a very important role. As we've seen over the last few years, Indian regulators have relaxed guidelines to encourage the development of passive investment vehicles such as the ETFs. This also includes measures such as reducing the cost of transactions and simplifying the process for launching new ETFs. Additionally, the Securities and Exchange Board of India (SEBI) has also been proactive in promoting investor education and awareness of ETFs, which has all helped in increasing their adoption. Talking about global trends, I think it's pretty similar to what we see here, where there is a place that is being found between active and passive funds looking at the investor appetite and therefore offering both in any market becomes quite important. 

Ali Curi: Anil, I welcome your thoughts on anything you want to add with what Sandeep shared. 

Anil Ghelani: Sure. I think a very correct point that there is a huge focus from the regulators and to ensure that in the rapid growth phase because there is a sudden and sharp move.

So it's important to make sure that the proper regulatory framework is put in place to take care of investor protection, to take care of suitable enhancement of investor awareness. And I believe that has been done in a very measured and a calibrated way. Like we discussed earlier, in fact, there has been a couple of government administered bodies like the EPFO or Employees Provident Fund in India, which has been using ETFs for their asset allocation to take exposure to equity.

There have been disinvestment vehicles used for allocation of both debt as well as equity. And as a part of this, there is a very clear and very measurable focus on a good regulatory environment. So I feel all in all, there has been a very prudent and very robust regulatory framework put in place, which can sustain and enable even greater growths of the ETFs and index funds industry in India.

Ali Curi: And also Anil, I'd like to add one more item to that list of broader perspectives. Sustainability and ESG are hot on institutional scorecards. Is there a growing interest in ESG ETFs in India, because if so, how are asset managers incorporating sustainability into their ETF offerings? 

Anil Ghelani: You're absolutely right, Ali, that ESG and not just ESG, but I feel a larger and a broader thing on sustainability, other than just ESG has been on the forefront, not just institutional, but even to a great extent in retail and HNI investor as well.

However, I feel that ETFs specifically, it's still yet within nascent, and it's not so easy to even create certain indexes on which such products can run in a very good way at this stage. So I believe how the ecosystem has been evolving right now in India is that most large asset managers and asset owners including us, for example, at DSP, we have become very aware, we have, many of us have become signatories to the UNPRI, that is the United Nations Principles of Responsible Investing, and we adopt certain principles into our overall investment framework across the firm, not just for creating one particular ETF saying that, okay, here is one ESG ETF and I've done my responsibility.

No, that is not yet working in a good way because it is hardly impact[ed] any demand for just ESG level ETFs. Hence, instead of that, at this point of time, everybody has taken a larger step creating units and teams within the investment research function so that certain filters, certain oversight of ESG is incorporated in the overall investment framework.

Ali Curi: Great, Anil. Thank you. Those are some very interesting ESG developments. Indeed.

ION Ad: This episode is brought to you by ION. At ION our clear derivative solutions automate your complete trade life cycle and deliver actionable insights whenever and wherever you need them. We offer execution and order management, post trade processing, and a complete front to back business solution. To learn more, visit us at iongroup.com/markets, or email us at markets@iongroup.com. 

Ali Curi: Sandeep, looking ahead at future developments of the Indian ETF landscape, how will it develop over the next few years? Do you foresee growth from a wider range of investors, such as retail investors or pension funds? 

Sandeep Sabnani: Yes. Firstly, I think we will see continued growth and support from regulators to ensure there's a balance in the market between active and passive investments.

In terms of investors, growth in the wider economy will continue to create new investors and ETFs will continue to be the most accessible way for them to invest. Consequently, they will continue to be attractive to both retail and institutional investors. And I also think we'll see an increasingly diverse ETF landscape with a wider range of asset classes and thematic ETFs.

These developments are going to make the ETFs even more intriguing for investors. That said, it will be interesting to see how the latest changes to the long term and short term capital gains taxes will impact the investment patterns in India in general, and whether that has specific impact on ETF adoption.

From a pension fund point of view, Anil just mentioned about the PFO leveraging ETFs for their asset allocation, which is a positive trend for ETFs to grow in the future. 

Ali Curi: And Anil, what are your thoughts? Do you think Indian ETFs will include a wider range of asset classes? 

Anil Ghelani: Yes, most certainly. In fact, as we speak today, we have a wide range of ETFs across equities, fixed income, commodities.

Very soon, I believe we will be permissible to launch hybrid, [it] means multi-asset class ETFs, [that] currently we do not have, but we are very hopeful that that is also going to become reality very soon. We at DSP as well as many others, we have been trying to get such approvals in place and we believe that very soon it will get permissible.

So soon we will not have just plain vanilla ETFs on large broad based indices like Bellwether Index in India, like a BSE Sensex or NSE 5050, or let's say how in US context we have S& P 500, but across many others, which will be fixed income, which we already have gold, silver as commodities. Maybe we'll get permission to do certain others as well, maybe spending across some kind of an innovation and increased thematic kind of product range as well.

Ali Curi: Well, I think those are some great observations. Certainly gives us a reason to do a follow up episode at some point. I want to hear both of your takes on the following question. What's the one big thing you hope listeners will take away from this episode? And Sandeep, let's start with you. 

Sandeep Sabnani: Given the large presence of day trading in India, despite most traders incurring losses, there seems to be a relative lack of awareness about safer, effective ways of investing and generating wealth over the long term. I hope this episode will make our listeners aware of this exciting asset class, giving them another option in their investment journey. And given the regulatory support for ETFs and the host of ETFs available in the market today, I hope listeners are able to give ETFs some serious consideration if they haven't already.

Ali Curi: And Anil, what are your thoughts? 

Anil Ghelani: I'll add to something further. Sandeep very nicely touched upon what an investor should take away from this. Ali and Sandeep, I think your podcast has a very wide following, including various parts of the market ecosystem. So my message as a key takeaway would be for the friends in the brokering industry, one very important thing to keep in mind is that in India, like in some of the other parts of the world, we are already seeing a huge growth in ETFs. And like we discussed in the past 15 odd minutes, that there is a clear path that this growth is going to continue in a big way. Hence, in whatever way possible, if you are a part of the broking ecosystem in India, you need to, you must ensure you are involved in this in the best possible way.

And that should be not just by way of being an execution broker, but also by enhancing your involvement in the ecosystem by considering to take up market making and other related activities relating to enhancing the awareness, increasing the strength of the ecosystem, which will help you in a very big way going forward.

Ali Curi: Great, thank you Anil. 

And Sandeep, we're going to shift gears here a little bit, and I'm going to ask you about career advice that our listeners can learn from. Here's my question, "What's a specific habit or routine that you feel has contributed to your success?" 

Sandeep Sabnani: Thanks for the curveball, Ali. That's a nice one.

Success to me is being 1 percent better than what I was yesterday. And one habit that helps me with this is the way I listen to my podcast. So I am a podcast junkie and I have different podcasts for different activities throughout my day. This helps me consume a variety of information and I also leverage habit stacking for this.

So what I mean by that is, whilst I'm working out, I will be listening to a podcast on new and upcoming tech, such as In The Vault by a16z. Follow it up with a podcast on product management on my commute into work something like the Product Thinking podcast by Melissa Perri and then finally end the day by listening to more macro and leadership topics such as Lex Friedman, Merryn Talks Money on my way back home in the evening. So there you go. A bit more informed at the end of every day. 

Ali Curi: I think that's some great advice. And Anil, same question. What's a specific habit or routine that you feel has contributed to your success? 

Anil Ghelani: In my view, one particular habit or or one particular characteristic is that you need to ask more questions.

And very often, of course, your podcast is being broadcast to many countries, but very often in India or in many other often Asian countries, I would say no bias, but just this is my personal opinion, we as professionals and that too very often younger professionals who want such advice of how to grow in their career, we often tend to hesitate to ask more questions.

So my big learning and big advice is that never hesitate, ask more questions. Only when you ask questions, you will also learn more. Only when you ask questions, the people or the organization or the community or the company to whom you are asking questions, they will also come up to come and learn more.

So this is one very important learning I have done over the past years, which I would like to share with your listeners. And one other thing I feel that has worked very well is that often, if you are able to align yourself with an industry, which is now good growth phase, then your growth also can be better.

And I'm connecting that with our today's session, Ali and Sandeep, where we spoke about ETFs as a growing part of the Indian investment management ecosystem. And to all the listeners of your podcast, if after listening to this session, if you feel that yes, this is one particular segment of the market, which is growing very fast, and I feel in the coming years, it is going to grow very well, then try to align your career in whatever way feasible with such growing segments of the market. And that will always be a much more beneficial growth for your personal career as well. 

Ali Curi: Well, I think that's some great advice that we can all learn from.

Sandeep Sabnani, Anil Ghelani, thank you both for joining us on the podcast. I look forward to our next time. 

Anil Ghelani: Most certainly, Ali, thanks for having me here and it's always great to be part of ION and all the wonderful work you do. Thanks a lot. 

Sandeep Sabnani: Thanks Ali and Anil. I had a great time chatting to you both. Look forward to the next time. 

Ali Curi: And that's our episode for today.

You can follow ION Markets on X and on LinkedIn. Thank you for joining us.