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It wouldn’t be an overstatement to term the Indian Mutual Fund Industry as akin to Goliath-the biblical giant famed for his power and force. With 33 trillion rupees worth of assets under its management as of May 2021 and registering a year-on-year increase of almost 35.87 percent, the industry has only gone from strength to strength during the last few years.

This behemoth meets David, the diminutive, unpredictable hero who wins over Goliath with a slingshot in passive investing. Having caught great momentum over the last few years, it has steadily and certainly become a force to reckon with. Passive investment products, including the index or exchange-traded funds, make up for as much as 25% of the entire equity AUM (Assets under management) of the country, per AMFI data. Naturally, every major name in the industry, from Zerodha to Paytm and more, does not want to miss a chance to jump on this bandwagon. But why?

Is it time for Passive Investing?

With an intent to offer “simple to understand products for first-time investors”, Zerodha, which is currently awaiting its regulatory approval for an AMC has made it amply clear that passive investing is here to stay. Even Navi Mutual funds, backed by Flipkart co-founder Sachin Bansal, recently launched a Nifty 50 Index fund to tap this market. While the first ETF was listed on the Indian stock exchanges in 2002, around 21 ETFs were listed last year itself, with the 100th one enlisting this year. Five years ago, the Indian scenario would have been vastly different, with just 57 products and 2 billion dollars of AUM. 

In fact, there is another interesting trend to note. In the first quarter of 2021, the maximum number of schemes launched were actually passive (14). With 7 index funds, 3 ETFs, and 3 Funds-of-funds launched, mobilizing a total of Rs 2,278 crore rupees, the passive investment segment far outshined the number of income schemes (5) and growth-oriented mutual fund schemes (3).

The trend is in keeping with the recent AMFI (Association of Mutual Funds) data that corroborates the rise of passive funds, which include Index funds, ETFs, Gold ETFs, and Funds of Funds (FOFs).

Parameters January-March 2021 May 2021
Number of schemes 182 191
Net Inflows  Rs 20,062 crores Rs 9,331 crores
Net Asset Under Management Rs 3,21,657 crores Rs 3,38, 723 crores

Source: AMFI Quarterly Data.

“Passive investing is slowly gaining ground in India as several mutual funds have launched index funds. Index and passive funds are a great way for investors to save on high fund management costs. Investors can earn 0.5% to 1.5% higher returns vs actively managed funds due to low expense ratios. Several actively managed funds are failing to beat the index, making passive and index funds a very attractive offering. We have seen several AMCs launch passive funds in the last 3-5 years as there has been a strong demand for passive products as investors have become aware of high expense ratios and poor performance of many actively managed funds.”, said Shaily Shah, Co-founder, Tarrakki, an online mutual fund investment app. 

Passive investment products are cost-efficient in nature as well, since they only levy a fee of 0.1-0.2 percent as opposed to almost 1-2 percent levied by actively managed funds. Since passive funds are simplistic, easy to track, and do not require regular market monitoring, they automatically make for lower-cost, effective investments. 

International Scenario

In its recent report titled “Asset & Wealth Management Revolution: Embracing Exponential Change”, taxation and consulting titan PwC predicted positive growth for the passive asset management segment, reaching almost 36.6 trillion dollars by 2025, making up for almost 25 percent of the global asset under management, which is estimated to rise to 145.4 trillion dollars in the next 4 years. 

Globally, while active investing rules the roost, passive investments too, have seen encouraging numbers, with over 7000 products having a total AUM exceeding 5 trillion dollars. The US (68 percent) leads the passive investment sector and rightly so, thanks to the Vanguard company, founded by John Bogle, the pioneer of passive investing in the US and around the globe. Europe (16 percent) and Japan (6.5 percent) follow far off, per S&P data. 

Regulatory Ease

Paired with regulatory ease and low-cost, widely scalable, and accessible online platforms to promote investment in mutual funds like Groww, Paytm Money, and more, the passive investing industry is all set to grow in the coming years. 

SEBI (Securities and Exchange Board of India) interventions, like clearly outlining the prevention of small and mid-cap funds in the large-cap funds’ category in a bid to generate better returns also fuelled the growth to some extent. 

Rohit Shah, the founder of Getting you Rich, a Mumbai-based personal finance advisory, also highlighted the increased accessibility these platforms enjoy. “Accessibility is no longer a challenge. Investors are also realizing that and with the increasing number of good passive products, they are being spoiled for choice. But I think that the widespread acceptance will take probably a decade or two. As you can see in terms of the penetration, it is very low. And I think the whole challenge is mutual funds as a product itself, which has yet not amassed high penetration. But the whole idea of passive investing is to reduce the risk factor and not to focus on just the winner, and this strategy will and is definitely gaining traction in India”, he signs off.