What drives fund flows to index ETFs and mutual funds? A panel analysis of funds in India

This paper examines the performance and determinants of fund flows to index exchange traded funds (ETFs) and index mutual funds in India that track either S&P BSE SENSEX or CNX Nifty. We empirically show that index mutual funds track their underlying better than index ETFs. We further contribute to the literature using a panel regression analysis of funds and find that ETFs with lower expense ratio and large asset base attract more funds. Age of fund is not an important factor driving fund flows to ETFs, but it is the newer index mutual funds that attract more funds than the existing ones. The study provides evidence that investors neither take cognizance of the past performance nor the past returns of their benchmark returns of index mutual funds and ETFs. The study also finds that expense ratio is a major factor that attracts investments and fund managers would do well to reduce the expense ratio and the factors driving fund flows to index mutual funds vary depending on the underlying benchmark index. The findings of the study have policy implications, as they clearly identify the distinctive factors that drive fund flows to ETFs and index mutual funds.