The rise of ETFs in India: Why Gen Z is saying no to fees

Economic Times

2 days ago

Gen Z's investment ethos: Value, transparency, and control
Live Events
The digital dividend and global trends
Challenges and the road ahead
India's financial landscape is undergoing a remarkable transformation, propelled by a new wave of investors reshaping how wealth is built and managed. At the forefront of this change is Generation Z—digital natives born into a connected world—whose investment preferences are clear: they value transparency , flexibility, and cost-efficiency. As a result, Exchange-Traded Funds ( ETFs ) have emerged as the preferred investment vehicle for young Indians, marking a decisive shift away from traditional, fee-heavy models.India's economic optimism is tangible, with projected GDP growth of 6-7% annually, on the heels of a record number of IPOs in FY2024-25. The country's increasing presence in global equity indices further highlights its rising influence on the world stage. Against this backdrop, Gen Z investors are making their mark—digitally savvy, financially informed, and deeply conscious of the value they receive for every rupee invested.ETFs align perfectly with this ethos. While traditional mutual funds have been popular for decades, they often come with management fees and hidden charges that can quietly chip away at returns. Conversely, ETFs offer a low-cost , passive investment approach, with expense ratios significantly lower than those of actively managed funds. Over the long term, this cost advantage can lead to substantially higher net returns—especially for young investors with extended investment horizons.Transparency and liquidity are equally vital to Gen Z. Traded on stock exchanges, ETFs provide real-time pricing and the flexibility to buy or sell during market hours. This level of control and visibility resonates with a generation accustomed to instant access and seamless digital experiences. Additionally, ETFs offer built-in diversification, allowing investors to gain exposure to a broad basket of stocks or bonds through a single instrument—simplifying portfolio management and risk mitigation.India's digital revolution has democratized access to financial markets. Widespread smartphone usage, the rise of fintech platforms, and supportive regulations for digital onboarding have made investing more accessible than ever. Raised in an environment of apps and algorithms, Gen Z naturally gravitates toward investment products that are easy to understand, access, and manage.Globally, the popularity of ETFs is on the rise. India's share in major emerging market ETFs has grown significantly—now accounting for over 20% of the Vanguard FTSE Emerging Markets ETF (VWO), double its share from five years ago. This shift reflects increasing international confidence in India's economic prospects and the sophistication of Indian investors aligning their portfolios with global best practices.For Gen Z, avoiding high fees is about more than saving money; it's about maximizing value and ensuring their investments work as hard as they do. In an era of abundant information and diverse options, paying high management fees for average performance is no longer acceptable. ETFs, with their low-cost structure, empower investors to retain more of their returns and compound wealth more effectively over time.Over the past decade, ETFs as a category have delivered robust returns, often closely tracking the performance of the broader equity markets they represent. For example, global equity ETFs have historically mirrored the long-term gains of major stock indices, with average annualized returns in the range of 7-10% over extended periods, depending on the market and asset class.Analysis of ETF portfolios from 2007 to 2024 shows that ETFs posted positive returns in roughly two-thirds of all months, demonstrating both resilience and the potential for steady wealth accumulation over time. While individual ETF performance varies, the overall track record underscores why so many investors—especially the younger generation—are gravitating toward these low-cost, diversified vehicles for long-term growth.While the ETF revolution is promising, challenges remain. India's complex capital gains tax regime—such as the 12.5% annual tax on unrealized gains—can impact net returns. Investors must understand these nuances and seek professional advice when necessary. Nonetheless, the overall trajectory is clear: ETFs are poised to become central to India's wealth creation story.This shift signifies more than a trend; it marks a paradigm change in how Indians, especially the young, approach investing. As India's economy continues to grow and markets mature, ETFs will play an increasingly vital role. For Gen Z, the message is straightforward: invest smartly, keep costs low, and harness technology to build a secure financial future.At HDFC Securities, we are dedicated to equipping this new generation of investors with the tools, knowledge, and platforms they need to succeed. The future of investing in India is bright, and ETFs are leading the way.(The author, Dhiraj Relli is the MD & CEO at HDFC Securities): Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)