India Exchange Traded Fund ETFs Explained www.deekpay.com

What are Indian Exchange Traded Funds (ETFs)

An Indian Exchange Traded Fund (ETF) is a financial instrument designed to track the amount of money spent in theIndiaperformance of a basket of securities listed on a stock exchange. India ETFs may reflect the returns of major indices, sector groups or different market capitalisation sizes, providing investors with broad exposure to the booming Indian economy or a part of it through diversified assets.

There are a number of exchanges operating in India, the most popular of which is the National Stock Exchange of India (NSE).The NSE is one of the world's most heavily traded exchanges and offers the most widely traded stocks in India as well as different indices tracked by ETFs, including the NIFTY 50 - the largest and most liquid domestically listed Indian collection of securities.

About India Exchange Traded Funds ETFs

India is one of the most favoured markets for investors. Picking stocks in India is a daunting task that can only be accomplished by those with knowledge of Indian domestic companies, local dynamics and a considerable appetite for risk. Investing in India is fraught with problems: investing directly in India requires overcoming challenging regulatory hurdles, while taking the offshore route by purchasing global and American Depository Receipts (ADRs) brings with it a host of unfavourable legal and tax implications.

This makes ETFs arguably the best way to access India. Listed on exchanges and traded throughout the day, these low-cost instruments, like ordinary stocks, are usually passively managed, meaning they are designed to replicate the performance of the stock market as a whole or of a particular sector or trend, rather than picking individual winners by mirroring holdings in a specified index (a hypothetical portfolio of securities representing a particular market or part of it).

As of December 2023, there are 14 ETFs investing in Indian equities, VettaFi said.

A large portion of these track MSCI India or the NIFTY 50, which have a bias towards large companies. Others focus on more niche areas such as small caps, consumer stocks and former state-owned enterprises.

Investors can also invest in India through emerging market funds and BRIC ETFs, both of which tend to account for a large percentage of the country's equities.

India ETF Example

With $7 billion in assets under management (AUM) as of December 2023, the iShares MSCI India ETF (INDA) is the largest ETF operating in India to date. INDA aims to provide returns similar to those of the MSCI India Index, whose 122 constituents account for approximately 85% of the Indian stock market.

The fund favours financials with an expense ratio of 0.64%. multinational energy conglomerate Reliance Industries Limited (RELIANCE.NS) tops the individual stock allocation with a weighting of 7.8%.

Advantages of India ETFs

India has the world's 18% population, the world's third-largest purchasing power parity (PPP) and, along with China, is on track to overtake the US as the world's largest economy.

These characteristics and prospects offer a wealth of opportunities for domestic companies and generate strong returns for investors who hold these stocks.

All signs point to a further increase in India's Gross Domestic Product (GDP) growth rate in the coming years. Experts expect the spread of e-payment platforms, the growth of the middle-income group and increased consumer spending to strengthen the already booming economy and, in turn, its stock market.

Note: The Indian economy is known for its knowledge-based industries, such as information technology, finance and healthcare.

Over the next decade, experts believe the financials, non-essential consumer goods and technology sectors will deliver above-average returns. This bodes well for the performance of India ETFs.

Criticism of India ETFs

India's liberal economic policies and long history of parliamentary democracy mean that it is widely regarded as a safer investment destination than any of its neighbours. However, it is still an emerging market and therefore carries a higher level of risk than more mature markets. The potential rewards are huge, but so are the chances of huge losses.

After Narendra Modi became prime minister in 2014, India implemented a series of ambitious programmes, including demonetisation, the implementation of the Goods and Services Tax (GST) and corporate deleveraging, each of which could lead to an economic slowdown.

Moreover, India faces formidable challenges in its transition from an emerging market to a developed economy. India must improve its economy, but also its public policies, international relations, human rights and infrastructure. Failure to address each of these areas could lead to the withdrawal of foreign investors, slower economic growth and falling stock markets.

It is also worth noting that any returns generated by these instruments may be reduced by higher than usual fees. International investments face higher exchange rate costs and brokerage fees, which means ETFs catering to the Indian market charge higher expense ratios than most domestic funds.

Special Note on EFT in India

Currency risk

Many investors underestimate the impact of currency fluctuations on total returns. When you hold a stake in an offshore business, you are also betting on its currency.

Unfortunately, the Indian rupee has underperformed against other major global currencies over the past few decades. A weak currency enhances the country's export ambitions and helps Indian companies sell their goods internationally. It also erodes returns for overseas investors.

Many Indian ETFs trade in US dollars. However, they are still exposed to the currency risk of their underlying securities.

During periods of dollar strength and rupee depreciation, it may be wise to invest in ETFs that hedge against currency risk. The objective of these instruments is to give investors returns that are closer to the local currency returns of the country's stock market index.

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