'ETFs in debt have a huge potential for investments'

Fintech entrepreneur Sanjiv Shah brought ETF, or exchange-traded fund, investment to India in 2001. He launched the country’s first Nifty 50, gold and CPSE ETFs. Shah left the mutual fund (MF) industry in 2017, but his entrepreneurial fire is lighting others. In an interview with Mint, Shah talked about his recent work, trends in the ETF space and anecdotes from his MF industry days. Edited excerpts:

- Aprajita Sharma

You ushered in the ETF revolution in India with NiftyBeeS, a Nifty equity ETF, launched in 2001 with Benchmark Mutual Fund. Describe its growth today?

The idea of benchmark stemmed from two philosophies-one, that active management doesn't work. Today, we have enough research to show that, but even in the early 2000's active funds were underperforming, we had a couple of research published in the Journal of Indexes showing that. And two, that the intermediary who sells/advises on financial assets including mutual funds should be an agent of the investor and not the AMC (asset management company), her remuneration should come from the investor, then her whole approach to advice would change. It's sad that it still is work in progress and not fully implemented. We-Rajan Mehta, Sanjay Gaitonde and myself, co-founders-felt that we needed an AMC which believed in these twin philosophies. ETFs were the right instrument for this as it was an indexlinked product and with the vast network of NSE it would have no distribution fees embedded. Today, ETFs are being embraced and we are delighted by the fact that size has grown to more than 16 trillion.

Data from DSP Mutual Fund shows the six-month average volume of a large liquid stock like Reliance Industries Ltd (RIL) is ₹1,948 crore vs ₹78 crore volume of Nippon India ETF Nifty 50 BeEs, one of the most liquid equity ETFs in India (4% of RIL). The six-month average volume of Apple is nearly 26.15% of the SPDR S&P500 ETF. What are your suggestions to tackle the liquidity problem in ETFS?